This article develops a model that shows how firm size—that most important firm-level correlate of R&D—moderates the impact of demand- and supply-side government policies that support R&D. The most robust result is that government support to product R&D will elicit less of a response the greater is average firm size within the industry. This result suggests, for example, that government support to upstream research in the life sciences will stimulate less downstream industrial investment in the development of new drugs to the extent that the firms in the downstream industry are larger. The model also predicts that where entry is less encumbered, we can expect demand-side subsidies to elicit greater product R&D within an industry. Thus, to the degree that, for example, barriers to entering the solar panel manufacturing industry are lower, we should expect R&D on solar panel development to rise more in response to tax credits for their purchase.

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