Public research and development money unlocks private investment and lasting economic growth

Strategic public investment in research and development (R&D) can begin boosting economic activity immediately, according to a study led by the University of Southampton. The research shows it can also mobilise private R&D, supporting economic growth for years.

The study, conducted with UCL and the World Bank and published in The Economic Journal, finds that government-funded R&D is an unusually productive form of public investment. Rather than displacing business activity, R&D can encourage additional private investment and boost economic activity even before the full technological benefits of research emerge.

“At a time when governments are seeking to rebuild industrial capacity while operating within tight fiscal constraints, our findings show that the composition, design and credibility of public investment can be as important as its overall size,”  says lead researcher Dr Vincenzo De Lipsis.

He adds: “There are many examples of rapid innovation led by public investment, including efforts to develop alternatives to fossil fuels and the recent race to develop COVID-19 vaccines. We wanted to understand how quickly the wider economic effects of public R&D investment materialise, how large they are, and whether they persist over the long term.”

The research team examined data from the US Bureau of Economic Analysis, analysing over 280 quarterly economic observations between 1947 and 2017. This included data on public and private investment, other government expenditure, tax revenues, and gross domestic product (GDP).

The US has a long history of publicly funding innovation, allowing the researchers to model the aggregate effects of government R&D investment over a 70-year period and trace how its impact develops over time.

The results show that public R&D has a considerably stronger and more long-lived effect on economic activity than ordinary government spending, partly because of its ability to ‘crowd in’, or stimulate, private investment. Each additional dollar of public R&D spending was estimated to generate between $2.60 and $4.30 in additional economic output, after just one year.

The authors argue that government has a special ability to stimulate innovation and growth due to its financial capacity and its ability to make credible long-term commitments. Strategically directed R&D, supported by innovation-oriented procurement, can help create new markets, strengthen productive capacity and give businesses greater confidence to invest.

The study also provides evidence that businesses may begin adjusting their investment plans before public R&D expenditure is fully deployed. Clear and credible commitments can therefore amplify the effects of public investment by reducing uncertainty and influencing private investment decisions in advance.

The researchers conclude that public funding for research and development has a powerful role to play, but that public initiatives should not replace private ones. Instead, the two are complementary: public R&D can address long-term, high-risk challenges and lay the foundations for innovation, while private R&D can build on these foundations and develop commercially viable solutions with the speed and efficiency encouraged by competitive markets.

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Notes for editors

1. The paper ‘Macroeconomic effects of public R&D’ is published in The Economic Journal, DOI: 10.1093/ej/ueag061 and can be read here:
    
2. For interviews, contact Peter Franklin, Media Manager, University of Southampton. press@soton.ac.uk +44 23 8059 3212
    
3. More about economics at the University of Southampton can be found here:
    
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