This paper studies the effects of different public innovation funding programs on the
innovation output and export performance of small and medium-sized enterprises (SMEs).
We evaluate the effectiveness of regional, national and European funding programs
implemented in Germany for both product and process innovations. Our panel study shows
that public financial support contributes to higher innovation outputs, which in turn translates
into higher export success in later years. This relation however only holds for certain sources
of public funding and certain types of innovation output. Innovation support from the
European Union and national programs for cutting-edge technology that results in higher
sales with new-to-market products shows a significant positive effect on SMEs’ export
performance. For funding programs run by regional authorities, we find similar though
relatively smaller impacts on both innovation output and exporting. Bottom-up funding at the
national level—which allows firms to freely define the design of the funded innovation
projects in terms of content and cooperation—increases sales with innovations that are only
new to the firm, but these innovations have limited impacts on export success. Our results
suggest that public innovation programs should challenge SMEs to go for more ambitious
innovations in order to strengthen their competitiveness