Government Spending Shocks and Firm Innovation
46 Pages Posted: 8 Dec 2017 Last revised: 20 May 2019
Date Written: January 16, 2019
Using news-based military build-up shocks that are exogenous to business cycle variation, we show a negative association between government spending and firm-level innovation. Firms respond to spending shocks by reducing innovation across every stage – R&D inputs, patents and new product announcements. The results are robust to alternative measures of government spending shocks, additional controls for macroeconomic conditions, and different sample periods. Consistent with the idea that a positive spending shock reduces aggregate demand and hence the incentive to innovate, we find the negative impact of government spending on innovation is stronger among firms that are more vulnerable to demand downturns. Overall, our findings suggest that government spending deters firm innovation, which is a key driver of long-run economic growth.
Keywords: Government spending, innovation, patents, R&D expenditure, new product announcements, crowding-out effect
JEL Classification: G31, G38, H32
Suggested Citation: Suggested Citation