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 longitudinal 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 many OECD countries, expenditures for defense-related R&D represent by far the most important form of public subsidies for innovation. 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. On average, a 10% increase in government-financed R&D generates a 5% to 6% additional increase in privately funded R&D. 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 productivity gains.
Enrico Moretti, Claudia Steinwender and John Van Reenen
3 January 2025
The Review of Economics and Statistics 107(1) , pp.14-27, 2025
DOI: 10.1162/rest_a_01293
https://direct.mit.edu/rest/article/doi/10.1162/rest_a_01293/114751/The-Intellectual-Spoils-of-War-Defense-R-amp-D
This work is published under POID and the CEP's Growth programme.