Drivers of R&D investment in the defence industry: evidence from Spain

This paper analyses the main drivers of R&D investment in the Spanish defence sector at the firm level. In particular, we analyse the factors influencing the decision to innovate or not, and those that affect the relative amount of resources devoted to the innovative process. Using data from the Ministry of Defence and the balance sheets from over 650 companies from 2003 to 2008, a Heckman selection model is applied to account for the firm's decision to perform R&D investment (or not). Our estimation results show that for firms holding operations within the Spanish defence industry, both the long-term strategic decision on R&D engagement and the short-term decision of R&D investment were driven by the intensity of their participation in contracting with the Ministry of Defence; hence, the demand pull hypothesis is confirmed.