The Relationship between Federal Contract R&D and Company R&D

According to recent estimates, federal budget outlays for research and development (RD this component will rise 28 percent, and absorb 70 percent of all federal R&D spending in 1984, compared to under 50 percent in 1980. Since work corresponding to about one-half of the dollar value of the federal R&D program is generally performed by private industrial firms under contract with federal agencies, the rapid increase in federal R&D outlays will presumably be reflected in a similar increase in the value of commitments by industrial firms to perform government R&D. One of the most important economic questions posed by the large prospective increase in resources allocated to federal contract R&D concerns its consequences for the economy's rate of technical progress, of productivity growth. In the next section I argue that the ultimate impact on productivity depends on how company decisions to finance R&D are affected by the availability of federal contract R&D funds. I then provide a brief review and critique of previous studies of the relationship between companyand federalfinanced R&D performed in industry, and present new estimates which differ from existing ones with respect to both methodology and implications. These estimates are consistent with the hypothesis that increases in federal R&D activity tend to be associated with significant reductions in companyfinanced R&D. A number of studies have attempted to determine the ceteris paribus effects of company and federal R&D on the rate of productivity growth (P) by estimating variants of the equation