| Abstract: |
In the US and many other OECD countries, expenditures for defense-related R&D
represent a key policy channel through which governments shape innovation, and
dwarf all other public subsidies for innovation. We examine the impact of
government funding for R&D - and defense-related R&D in particular – on
privately conducted R&D, and its ultimate effect on productivity growth. We
estimate models that relate privately funded R&D to lagged government-funded
R&D using industry-country level data from OECD countries and firm level data
from France. To deal with the potentially endogenous allocation of government
R&D funds we use changes in predicted defense R&D as an instrumental variable.
In both datasets, we uncover evidence of "crowding in" rather than "crowding
out," as increases in government-funded R&D for an industry or a firm result
in significant increases in private sector R&D in that industry or firm. A 10%
increase in government-financed R&D generates 4.3% additional privately funded
R&D. An analysis of wages and employment suggests that the increase in private
R&D expenditure reflects actual increases in R&D employment, not just higher
labor costs. Our estimates imply that some of the existing cross-country
differences in private R&D investment are due to cross-country differences in
defense R&D expenditures. We also find evidence of international spillovers,
as increases in government-funded R&D in a particular industry and country
raise private R&D in the same industry in other countries. Finally, we find
that increases in private R&D induced by increases in defense R&D result in
significant productivity gains. |