Moretti, Enrico, Steinwender, Claudia and Van Reenen, John 
ORCID: 0000-0001-9153-2907
(2019)
The intellectual spoils of war? Defense R&D, productivity and international spillovers.
CEP Discussion Papers (CEPDP1662).
London School of Economics and Political Science. Centre for Economic Performance, London, UK.
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Abstract
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 represents 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.
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