Private Investment in R&D to Signal Ability to Perform Government Contracts

Frank Lichtenberg

No 1974, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Official government statistics on the "mission-distribution" of U.S. R&D investment are based on the assumption that only the government sponsors military R&D. In this paper we advance and test the alternative hypothesis, that a significant share of privately-financed industrial R&D is military in orientation. We argue that in addition to (prior to) contracting with firms to perform military R&D, the government deliberately encourages firms to sponsor defense research at their own expense, to enable the government to identify the firms most capable of performing certain government contracts, particularly those for major weapons systems. To test the hypothesis of, and estimate the quantity of, private investment in 'signaling' R&D, we estimate variants of a model of company R&D expenditure on longitudinal, firm-level data, including detailed data on federal contracts. Our estimates imply that about 30 percent of U.S. private industrial R&D expenditure in 1984 was procurement- (largely defense-) related, and that almost half of the increase in private R&D between 1979 and 1984 was stimulated by the increase in Federal demand.

Date: 1986-07
Note: PR
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Citations: View citations in EconPapers (2)

Published as "The Private R&D Investment Response to Federal Design and Technical Competitions". From The American Economic Review, Vol. 78, No. 3, (June 1988).

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