The private spillovers of mission-oriented R&D programs

A new GROWINPRO study shows that mission-oriented funding of research and development strongly crowds-in privately financed R&D at the macro-regional level and fosters employment in high-tech sectors

The paper, Does mission-oriented funding stimulate private R&D? Evidence from military R&D for US states, focuses on defense-related R&D funded by the US government as a relevant example of mission-oriented type of funding. Defense R&D is the largest component of the total federal R&D budget (with a share ranging from 40% to 60%) and is largely used as a de facto policy tool to direct and shape innovation.

The research, authored by Gianluca Pallante, Emanuele Russo and Andrea Roventini, is based on a panel dataset of US states linking federal R&D obligations from the Department of Defense (DoD) to non-federally funded private R&D expenditures for the period 1968-2017 and high-tech employment for the period 1999-2018. Employing state-of-the-art identification strategies, they estimate the causal impact of defense-related R&D on private R&D investments at the US State level.

The findings indicate that a 1 % increase in military R&D funding over 4-5 years stimulates between 0.11% and 0.14% increase in privately financed R&D expenditures. In particular, the impact of public R&D exceeds its dollar value as it crowds-in additional private research efforts. Such stimulus also translates into higher employment levels in R&D-intensive industries and in particular for engineering occupations with an estimated response in the range of 0.05% – 0.1%.

These results point at the effectiveness of large mission-oriented programs in promoting additional innovation efforts in the private sector. Such programs can help relaxing credit constraints on innovative actors, making profitable private spinoff projects; they can also nurture new firms and foster new R&D collaborations. This adds up to their already acknowledged potential to direct technological change towards solving tall complex technological problems associated to societal challenges.

Overall, the findings are extremely relevant also in the context of the European debate. Mission-oriented type of funding was already central in the Horizon Europe  framework program and will play a large role also for the NextGenerationEU initiative, the largest stimulus package ever financed through the EU budget, with a significant share devoted to address grand societal challenges such as climate change and digital transformation. Results from this new GROWINPRO research bears support to these policy actions suggesting that they can have high payoffs due to private research spillovers. As such, they can be crucial to promote post-COVID recovery, as well as sustainable and inclusive growth over the long term.

Download the working paper here.