Fact of the Week: Every Dollar of U.S. Government-Funded Defense R&D Leads to an Additional 52 Cents in Private R&D

Source: Enrico Moretti, Claudia Steinwnder, and John Van Reemen, “The Intellectual Spoils of War?: Defense, R&D, Productivity and International Spillovers,” University of California, Berkeley, NBER and CEPR, August 26, 2020.

Commentary: Governments have invested heavily in defense-related R&D to gain a technological edge over geopolitical rivals. This has a knock-on effect for private R&D in certain sectors of the economy that are directly related, such as computers and aerospace. That connection has been widely studied. But relatively little is known about the broader effects of investment in defense-based R&D. Three economists examined this relationship by looking at the aggregate effect of government-funded R&D on private-sector R&D, output, employment, and wages in OECD countries over 23 years. After controlling for variations in defense spending, the authors find that every dollar of defense R&D spending in the United States increases private sector R&D spending by almost 52 cents—such that private R&D investment would have been $85 billion lower over the studied period without government-funded defense R&D. But the multiplier effects vary in other OECD countries. For example, each additional euro France spends on defense R&D leads to just 10 cents more private R&D. This implies some countries would be better off investing government R&D funds in other, non-defense, sectors.