Private Investment in R&D to Signal Ability to Perform Government Contracts
44 Pages Posted: 25 Jun 2004 Last revised: 18 Dec 2013
Date Written: July 1986
Official government statistics on the "mission-distribution" ofU.S. R&D investment are based on the assumption that only the governmentsponsors military R&D. In this paper we advance and test thealternative hypothesis, that a significant share of privately-financedindustrial R&D is military in orientation. We argue that in addition to(prior to) contracting with firms to perform military R&D, thegovernment deliberately encourages firms to sponsor defense research attheir own expense, to enable the government to identify the firms mostcapable of performing certain government contracts, particularly thosefor major weapons systems. To test the hypothesis of, and estimate thequantity of, private investment in 'signaling' R&D, we estimate variantsof a model of company R&D expenditure on longitudinal, firm-level data,including detailed data on federal contracts. Our estimates imply thatabout 30 percent of U.S. private industrial R&D expenditure in 1984 wasprocurement- (largely defense-) related, and that almost half of theincrease in private R&D between 1979 and 1984 was stimulated by theincrease in Federal demand.
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