This JRC Technical Report studies the impact of innovation incentives on the innovative performance of Italian manufacturing firms. It is part of the research on innovation policies carried out by the Information Society (IS) Unit at JRC-IPTS in the context of the IDEA Action during the last two years. While the results of this paper might not be easily generalizable to other EU countries, as they are based on specific incentives applicable only to Italian firms, the report is very interesting for innovation policy research as it shows how counterfactual impact evaluation can be applied in practice. In the first part of the paper the standard Propensity Score Methodology is applied, and this, under the “selection on observables” hypothesis, allows us to estimate the impact of generic innovation subsidies. This corresponds to the typical exercise found in the literature that uses Community Innovation Surveys (where the treatment status is usually recorded with a dummy variable). In the second part of the report, the focus is on a specific Italian Law (Law 170/1997), which introduced incentives to innovation particularly targeted at firms located in economically disadvantaged areas. In this case, we show how it is possible to estimate the impact of such a Law using an instrumental variable technique that takes into account the potential problem of endogeneity of treatment (some of the factors affecting the likelihood of access to treatment for treated firms also affect their economic performance).