The Decline of Government R&D in Innovation: Establishing Facts and Evaluating Consequences

Since World War II, the U.S. federal government has been the country’s largest funder of research and development (R&D), with tripartite objectives of national defense, health, and economic growth. Much attention has been given to studying large expansions of federal R&D investment. Yet federally-funded R&D, as a share of domestic R&D or GDP, has been on decline since its twentieth century peak—an era which has also seen a major reorientation of the federal portfolio from defense to biomedicine. The consequences of these changes are not yet fully understood. A traditional economic view is that public R&D fills gaps that markets leave behind. However, since the 1950s the U.S. (and global) innovation system have matured significantly, potentially leaving fewer gaps for public R&D to fill. Moreover, though the impacts of past public R&D investments often inspire new ones, there is less evidence on the effects of public R&D drawdowns and budget cuts to inform choices when renewing funding for programs. This research evaluates the impacts of declining public R&D and the pivot away from defense innovation. Using recently-collected long-run data on government-funded invention, paired with new data on the postwar scientific workforce, this project examines (i) the effects of federally-funded R&D on the development of complex, science-based technologies (i.e., “deep tech” innovation); and (ii) the impacts of large and abrupt cuts to defense research in the 1970s (before which the Department of Defense was nearly as large a funder of basic research as NSF) on the U.S. innovation system, including science, scientists, universities, and high-tech industries. The project results improve understanding of science and technology with new evidence on the effects of government withdrawal from R&D funding and produces new approaches to evaluating public-private R&D spillovers and identifying regularities and tensions that inform future policy choices. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.