Can large-scale R&I funding stimulate post-crisis recovery growth? Evidence for Finland during COVID-19

TL;DR

This study evaluates how increased research and innovation funding in Finland during COVID-19 can promote economic recovery, estimating that R&I funding contributed significantly to regional GDP growth post-crisis.

Contribution

It provides an ex-ante analysis linking R&I funding to economic recovery, using regional data to forecast growth contributions during the COVID-19 crisis.

Findings

Forecasted GDP recovery of 2-4% in 2021.

R&I funding contributed 0.4-1% to GDP growth.

Regional analysis highlights the importance of R&I in post-crisis recovery.

Abstract

The COVID-19 pandemic and subsequent public health restrictions led to a significant slump in economic activities around the globe. This slump has met by various policy actions to cushion the detrimental socio-economic consequences of the COVID-19 crisis and eventually bring the economy back on track. We provide an ex-ante evaluation of the effectiveness of a massive increase in research and innovation (R&I) funding in Finland to stimulate post-crisis recovery growth through an increase in R&I activities of Finnish firms. We make use of the fact that novel R&I grants for firms in disruptive circumstances granted in 2020 were allocated through established R&I policy channels. This allows us to estimate the structural link between R&I funding and economic growth for Finnish NUTS-3 regions using pre-COVID-19 data. Estimates are then used to forecast regional recovery growth out of sample and to quantify the growth contribution of R&I funding. Depending on the chosen scenario, our forecasts point to a mean recovery growth rate of GDP between 2-4% in 2021 after a decline of up to -2.5% in 2020. R&I funding constitutes a significant pillar of the recovery process with mean contributions in terms of GDP growth of between 0.4% and 1%.