The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers

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 crosscountry differences in private R&D investment are due to crosscountry 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.

A toolkit of policies to promote innovation

“…Azoulay et al (2019a) exploit quasi-experimental variation in funding from the National Institutes of Health across research areas to show that a $10 million increase in NIH funding to academics leads to 2.7 additional patents filed by private firms. Second, private firms themselves sometimes conduct publicly funded R&D. Moretti et al (2019) use changes in military R&D spending, which is frequently driven by exogenous political changes, to look at the effect of public subsidies for military R&D. They document that a 10 percent increase in publicly funded R&D to private firms results in a 3 percent increase in private R&D, suggesting that public R&D crowds in private R&D (and also, they document, raises productivity growth).…”

Public R&D Investments and Private-sector Patenting: Evidence from NIH Funding Rules

“…In addition, as discussed below, our paper goes beyond previous work trying to assess the causal impact of public funding (Blume-Kohout 2012, Toole 2007, Jaffe 1986, Adams 1990) by using plausibly exogenous sources of variation in funding. (To our knowledge the only paper to do this previously is Moretti et al [2014]).…”

“… 1 Adams (1990) uses distributed lags and panel data to shed light on the effect of scientific knowledge stocks on productivity growth at the industry level. Moretti, Steinwender, and Van Reenen (2014) use shocks to defense R&D induced by the end of the cold war to identify the impact of government expenditures on TFP growth, once again at the industry level. …”

The Political Economy of Brazilian Industrial Policy (2003 - 2014): Main Vectors, Shortcomings and Directions to Improve Effectiveness

“…9. Moretti, Steinwender and Van Reene (2019) estimate the impacts of public funding R&D -specifically defense R&D -both on private R&D and on productivity. The paper corroborates the occurrence of very positive spillover effects and the key role of innovation policies on economic growth.…”