Papers Commissioned for a Workshop on the Federal Role in Research and Development (1985) / Chapter Skim
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Assessing the Impact of Federal Industrial Research and Development Expenditure on Private Research and Development Activity
Assessing the Impact of Federal Industrial Research and Development Expenditure on Private Research and Development Activity
Pages 115-150
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From page 115... ...
Financial support from ache National Science Foundation (aria grant PRA 85-12979 deco ache National Bureau of Economic Research) and from the MacAr thus Foundation Faculty Research Program at Columbia Unifiers ity is gratefully acknowledged.
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From page 116... ...
Q* Quantity of privately financed Red)
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From page 117... ...
THE MARKET FOR PRIVATE R&D OUTPUT Economists engaged in the study of technical change sometimes find it useful to represent research and development as a production acti~ri~cy, an activity in which the services of R&D inputs (for examples scientists and engineers, Rho plant) are employed deco produce improvements in products or processes, which in turn constitute the output of R&D3 The measurement of R&D output, of course, poses maj or difficulties ~ In the absence of dla~ca on ache value, in cons Manic dollars' of improvemen~cs in products and processes, chose interested in measuring R&D output are confined to the analysis of " indicators" o f R&D output, such as patent counts e While economists are fully cognizant of ache serious problems associated with measuring R&D outpu~c (and, hence, witch measuring productivity of R&D inputs )
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From page 118... ...
The next three sections outline in detail echoes hypotheses chat imply that changes in federal R&D expenditure either cause shifts in the pri~ra~ce R&D supply schedule, or are correlated witch (but do not cause) shifts in the demand for privately produced improvements in products and processes.
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From page 119... ...
output by increasing uncertainty about the future course of technological change and, perhaps, as a result, depresses the quantity of private R&D investment in the long run CROWDING OUT lye crowding-out hypothesis is that increases in federal R&D activity increase ache private cost of producing R&D output by driving up the prices of specialized R&D inputs. The hypothesis is predicated on the assumption that federal and pri~ra~ce R&D employ similar types of resources, such as scientists and engineers, the aggregate supply of which is less than perfectly elastic.
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From page 120... ...
TABLE 1 Comparison of the Extent of Concentration of Federal and Company R&D Funds, 19 81 Federal Funds Percent of ~co~cal R&D funds spent by companies witch: 25, 000 or more employees 83 Fewer than 1, 000 employees 3 Percen~c of total R&I) funds spent by 20 largest RED performers Source: .
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From page 121... ...
090 Range .366 .118 Note ~ Federal and company R&D funds deflated using GNP implicit pric deflator ~ .. Source: Research and DeveJopmenc in Indusery 1983 National Science Foundation, 1985.
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From page 122... ...
FIGtJRE 2 Marker for Scientists and Engineers: Impact of Shift in Federal Demand from O~ to D F on Cage Rate and Private Employment of Sciert~cists and Engineers ~~ t 4, It \ · 1 OF l I ~ F \.~ Dp ~ S ~ \ D 1)
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From page 123... ...
, one might reasonably cony endure chat bF is fairly small, perhaps very small, re latitude deco bp . Me lack of info rmation about b is particularly unfortunate, since the effect of a shift in federal demand on private RED employment, A, is -bp.
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From page 124... ...
Federal obligations for R&D, in current dollars, have increased from $38 0 7 bills on in fiscal year 1983 ~co an estimated $520 3 billion in fiscal year 1985. This represents ~ nominal increase of about 30 percent or Lassoing a two-year increase in the price laurel of 10 percent or less ~ in increase in real federal R&D expenditure of at least 20 percent.
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From page 125... ...
D TABLE 3 Estimates of Elasticities of Real Starting Salaries of Engineers and Physicists with Respect deco Real Federal R&D Expenditures ~ estimates refer co the period from the late 1940 ' s to the early 1970 ~ s Es timated Range of Elasticity End neers .
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From page 126... ...
To summarize, there is fairly convincing evidence that increases in real federal R&D spending raise the wage rates of graduating scientists and engineers in the short run. Because the supp ly of graduates is much more e las tic in the long run (wi thin three to f ire years ~ there it is in tise shore run, such short- rust salary increases are likely to overshoot the tong- run response to an increase in federal R&1:)
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From page 127... ...
IGliRE 3 Crowding Out in the Short Run and the Long Run 5 S 2 - s3 c ~0 ~ D Quantity of privately financed R&D output ~ 125
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From page 128... ...
Chile the spillover hypothesis implies that increased federal R&D has an un~^guously positive effect on real priorate Rho output, ache implied effect on R&D input is indeterminate, ~ priori Al~chc~ugh priorate sponsors of R&D will be stimulated by knowledge sptIlovers to produce ~ greater quantity of innovations, they need to employ a smaller number of scientists, engineers, aced R&t) plant per innovation.
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From page 129... ...
S ince Ache government does no ~ know, in advance, which proj ects or areas of research are going to yield substantial spillo~rers, federal R&D investment decisions should be based on the expected, rather Chart extreme, value of spillovers.
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From page 130... ...
According to those data, during the period 1979-1985, less than 12 percent of ache value of R&D contract actions for which a n stage n of R&D was reported was for research or explora~cory development. (According to FEDS definitions, some applied research may be included in the "exploratory development" category.
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From page 131... ...
:.A=L_ ~ Distribution of 1981 Industrial R&D Expenditure o f R&~) and S ourc e o ~ Fiends Federal Funds ., by " S Cage ComcanY Funds Basic research 2.09' 3 .796 Apply ed research 14.3 23.
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From page 132... ...
TABLE 5 Distribution of Value of R&D Contract ~Actions, by " S tage " of arc, Fiscal Year 1979-Fiscal Year 1985 (dollars in billions) Research Exploratory development Advanced development Engineering detre lopment Operational systems development Management and support Commercial ization Not Repor ted To Cal Source "Federal Proctsremen~c Data System.
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From page 133... ...
TABLE 6 Ember of Contractor Invention Disclosures Rece inured by De Agencies and Number to which Government Acquired Title, 19 6 3 -19 72 tense (1)
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From page 134... ...
input prices and also reduce costs by increasing R&D input productivity, all R&D sponsors may not experience both effects, or they may not experience them to the same extent. Some of ache useful knowledge arising from federally supported R&D may spill over to, and reduce the costs of, foreign ~ for example, Japanese ~ R&D sponsors as well as domestic sponsors .
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From page 136... ...
The situation is reversed in the case of econometric studies of the relationship between federal industrial R&D and private R&~ : Estimates of the correlation between federal and private R&D obtained in econometric studies are generally (albeit not explicitly) interpreted as reflecting effects of federal R&D on the supply of - 134 _
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From page 137... ...
Thus, not only is a s ignificant fraction of private R&D defense-oriented, but the average privately financed R&D intensity of defense purchases is 3 . 39 times that of consumption expenditures.
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From page 138... ...
TABLE 8 'value of 197~ Privately Financed R&D Expenditure "Used" and Value of 1974 Final-Demand Purchases, by Selected Final-Demand Component Federal Personal Defense Consumption Line Expendi Sure Expendi ture (1) Value of priorate $1, 206.3 $49 Ill R&1)
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From page 139... ...
1.72% 0~54% * Segments such that the ratio of government sales to total sales > Source: Compustat Industry Segment data file r ~ 137 .10.
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From page 140... ...
This definition was adopted because a segment is required to disclose government sales only if the ratio of ache latter deco total sales is at least 10 percent. 1 The ratio of topical government sales reported by govers~mes`t - oriented segments to their total reported sales is S3 .5 percent; the corresponding ratio for ocher segments is less than one half of one percent .
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From page 141... ...
The estimated coefficient on f is positive and its difference from zero is highly statistically significant, a finding consistent witch the hypothesis that changes in ache composition of final demand account for a significant fraction of the short~run ~raria~cion in crd.2 lithe point estimate of this coefficient, .036 9 is much larger- -about three times larger- - than the estimated difference ~ crap - crdn) implied by both the Scherer and the business segment data.
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From page 142... ...
189 R2 ~ . 96 10 Notice: f is defined as ache ratio of federal purchases of goods and se~~.ces to GNP.
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From page 143... ...
implies that the restricted model does not adequately control for variation in federal demand. Relaxing the restriction in effect controls for the influence of federal demand and makes it possible to obtain a truer estimate of the partial effect of federal R&D expenditure on private R&D.
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From page 144... ...
TABLE 41 S to tistics from Aggregate Real Comply- Funded R&D - Expends Cure Regressions ~ ~ values in parentheses ~ Res tric~ced~ Made ~ Unres Eric ted "ode t Sum of FAD .330 .log coefficients ~ ~ (2045)
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From page 145... ...
Increases in federal R&D expenditure may, in principle, increase the average and marginal cost of private R&D performance by driving up the prices of R&D inputs of which the supply is less than perfectly elastic. On the other hand, federal R&D may lower private R&D costs by generating knowledge that is useful in the priorate production of innovations, hence raising the producti~ri~cy of privately employed R&D inputs.
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From page 146... ...
expenditure would provide rather strong evidence of spillovers. It has been demonstrated here, however, that changes in real federal R&D spending are correlated with changes in the composition of final demand, which shift the aggregate demand for private R&D Output.
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From page 147... ...
"Comparison and Analysis of Productivity Growth and R&D Investment in ache Electrical Machinery Industries of the United States and Japan. " Pacer presented at ache National Bureau of Economic Research Conference on Productivity Growth in Japan and the United States, Cambridge, MA, August 25 - 28, 1985 .
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From page 148... ...
261. The smaller be is, the greater do /da~ is, the wage increase resulting from a given federal demand shifts but ache smaller the private employment response to a gives wage increase .
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From page 149... ...
I t is cus tomary, and appropriate, when analyz ing re la~cionship s among time series, to de trend or otherwise render stationary the series. Inclusion of the time trend reduced substan~cially, but did not eliminate, serial correlation of ache residuals, so an adjustment for first-order serial correlation was made in es timating the mode l .
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From page 150... ...
27. lathe author experimented witch a large number of alternative specifications and found that estimates of stems of coefficients were much less sensitive to minor changes in equation specification than were estima~ces of individual coefficients.
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