Private Investment in R&D to Signal Ability to Perform Government Contracts

Official government statistics on the "mission-distribution" of
U.S. R&D investment are based on the assumption that only the government
sponsors military R&D. In this paper we advance and test the
alternative hypothesis, that a significant share of privately-financed
industrial R&D is military in orientation. We argue that in addition to
(prior to) contracting with firms to perform military R&D, the
government deliberately encourages firms to sponsor defense research at
their own expense, to enable the government to identify the firms most
capable of performing certain government contracts, particularly those
for major weapons systems. To test the hypothesis of, and estimate the
quantity of, private investment in 'signaling' R&D, we estimate variants
of a model of company R&D expenditure on longitudinal, firm-level data,
including detailed data on federal contracts. Our estimates imply that
about 30 percent of U.S. private industrial R&D expenditure in 1984 was
procurement- (largely defense-) related, and that almost half of the
increase in private R&D between 1979 and 1984 was stimulated by the
increase in Federal demand.