Does public R&D funding crowd-in private R&D investment? Evidence from military R&D expenditures for US states

Defense R & D represents the largest component of US public R & D spending and historically has promoted a wide range of civilian innovations. However, the empirical evidence on the impact of defense R & D is scant and it does not provide conclusive results on the possible crowding-in (-out) effects on private R & D investment. Exploiting a longitudinal dataset linking public R & D obligations to private R & D expenditures for US states, we investigate the impact of defense R & D on privately-financed R & D. To address potential endogeneity in the allocation of funds, we use an instrumental variable identification strategy leveraging the differential exposure of US states to national shocks in federal military R & D. We document considerable crowding-in effects with elasticities in the 0.11-0.14 range. These positive effects extend also to the labor market, when focusing on employment in selected R & D intensive industries and especially for engineers.