Does mission-oriented funding stimulate private R&D? Evidence from US States

This study empirically evaluates to which extent government-funded innovation policies can stimulate private expenditures in R&D. Among different policy tools, the paper focuses on mission-oriented innovation programs, which are gaining relevance in the public debate on (i) how to sustain the recent slowing trend of economic growth and (iI) to address pressing societal challenges such as poverty, the transition to an environmentally sustainable economy or population aging.

 

The authors use State-level US data, collected by the National Science Foundation, to build our variable for mission-oriented R&D funding. In particular, the authors only consider the amounts obligated by the Department of Defense as they are mainly driven by geopolitical motifs, making spending decisions arguably exogenous to the business cycle and macroeconomic conditions. Moreover, the historical evidence suggests that a large share of military spending for research is aimed at the achievement of high risk, high potential reward technologies, thus providing a natural proxy mission-oriented projects.

 

To overcome endogeneity concerns the authors rely on an identification strategy that assumes different regional exposure to national shocks: a common set up in applied regional macroeconomics literature. The authors find that increases in mission-oriented R&D significantly stimulate the non-federally funded part of business R&D expenditures. Estimates suggest that, for a 10% increase, the private sector complements with an additional 1.1 - 1.4% in R&D, thus highlighting a "crowding in” effect.

 

As defense-related R&D serves multiple sectors of the economy in a heterogeneous manner, we complement the analysis by providing additional evidence on how employment levels respond to this source of public funding. Sectors such as Computer and electronic products, Data-processing services, Telecommunications, exhibit significant positive responses.