Fact of the Week: A 1 Percent Increase in Mid-term Military R&D Funding Stimulates Increases Privately Financed R&D Expenditures by 0.11 to 0.14 Percent

Source: Gianluca Pallante, Emanuele Russo and Andrea Roventini, “Does mission-oriented funding stimulate private R&D? Evidence from military R&D for US states,” Institute of Economics and EMbeDS, Sant’Anna School of Advanced Studies, November 31, 2020

Commentary: Government spending is often thought to crowd-out private sector investment by increasing competition for, and reducing the supply of, a fixed pool of loanable funds. Three Italian economists tested the validity of this claim by examining the spillover effects of increases in defense R&D spending across all U.S. states from 1968 to 2017. By regressing that data with state-level high-tech employment data for the period of 1999 to 2018, they identified significant causal impacts of increased defense R&D spending on the private sector. Specifically, the economists found a multiplier effect of between 0.11 and 0.14, indicating that government spending can actually crowd-in, rather than crowd-out, private investment in R&D. This is possible because defense R&D spending can help to relax credit constraints on innovate sectors, increase profitability of spin-off projects, and foster entrepreneurship.