Fact of the Week: Public Investments in Nondefense R&D Have Rates of Return Between 150 to 300 Percent
Source: Andrew J. Fieldhouse and Karel Mertens, “The Returns to Government R&D: Evidence from U.S. Appropriations Shocks,” (working paper, Federal Reserve Bank of Dallas, Research Department, May 2023)
Commentary: In a working paper published by the Dallas Federal Reserve, authors Andrew Fieldhouse and Karel Mertens investigated the impact of government-funded research and development (R&D) on total factor productivity (TFP) in the United States. Fieldhouse and Mertens classified R&D as defense and nondefense, focusing on the effect of nondefense R&D. They rationalize that innovation caused by defense R&D is often not made rapidly available to the public leading to an insignificant impact on TFP. Though the common belief is that public investments in infrastructure lead to the greatest increase in TFP, the authors find that the effect on productivity by nondefense R&D is “consistently of a similar magnitude, and frequently greater.” Overall, the findings of the report indicate that the rate of return on R&D is between 150 to 300 percent, implying that there has been historical underinvestment in R&D for nondefense use. The authors suggest that federal funding for R&D should extend beyond tax credits and subsidies, to include greater funding and resources for R&D performed by federal agencies.
