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The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers

Enrico Moretti, Claudia Steinwender () and John van Reenen ()

No 14145, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In the US and many other OECD countries, expenditures for defense-related R&D represent a key policy channel through which governments shape innovation, and dwarf all other public subsidies for innovation. 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 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 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. A 10% increase in government-financed R&D generates 4.3% additional privately funded R&D. An analysis of wages and employment suggests that the increase in private R&D expenditure reflects actual increases in R&D employment, not just higher labor costs. Our estimates imply that some of the existing cross-country differences in private R&D investment are due to cross-country differences in defense R&D expenditures. 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 significant productivity gains.

Keywords: Defense; Innovation; productivity; R&D (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-cse, nep-eff, nep-ino, nep-knm and nep-tid
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Working Paper: The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers (2019) Downloads
Working Paper: The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers (2019) Downloads
Working Paper: The intellectual spoils of war? Defense R&D, productivity and international spillovers (2019) Downloads
Working Paper: The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers (2019) Downloads
Working Paper: The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers (2019) Downloads
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