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Federal Funding for R&D: Further Evidence That It Is Needed More Than Ever Before

Journal of Policy Analysis and Management CoverIn an era of ever tightening budget constraints, some, especially some conservatives now argue that federal funding for research is not critical for innovation. They claim that the private sector will make up for any losses in innovation resulting from a reduction in federal funding of R&D. In the latest edition of the Journal of Policy Analysis and Management (devoted to the examination of science policy and innovation), two scholarly articles clearly rebut this view.

Furman et al. argue that even modest science policy shifts can have a significant influence  on the composition of research as well as the pattern of international R&D collaboration. They find that following the United States’ 2001 policy, which banned the federal funding of human embryonic stem cell research (hESC); U.S. production of hESC scientific research lagged 35 to 40 percent below anticipated levels.  In other words, cutting federal funding for particular areas of science R&D results in significantly less innovation in that area.

At the broader level, Blume-Kohout presents similar results. However, this study relates to the benefits of increasing federal research support to research output. Specifically, it is revealed that increasing NIH funding by 10 percent results in a 4.5 percent increase in the number of drugs entering phase I clinical trials. Together, these studies show clearly that federal funding for life sciences research does not crowd out private sector funding, but in fact spurs significantly more of it.

These findings directly support the recent conclusions of the ITIF report: Leadership in Decline: Assessing U.S. International Competitiveness in Biomedical Research which found that public funding of R&D is critical to ensuring that the United States remain at the forefront of global research in the life sciences.  The report shows that federal investment in biomedical research catalyzed the initial development of and sustains the ongoing competitiveness of the U.S. life sciences industry, while generating tremendous rates of both public and private return in the process.  With social rates of return from life sciences research 7 percent greater than private, left to itself the private sector will under invest in life science research. That is why, even in the midst of tightening budget constraints, Congress needs to increase and then maintain NIH funding at least one quarter of one percent (0.25%) of GDP. Because recent research shows that public and private funding of R&D are complementary; doing so will expand private sector funding of research in the United States.


Image credit: Journal of Policy Analysis and Management

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About the author

Justin Hicks joined ITIF in June of 2012 as Senior Economic Policy Analyst. Prior to joining the ITIF as Senior Economic Policy Analyst, Justin Hicks finished his Ph.D. in Economics at the University of California, Merced. His research focused on potential spillovers of cooperative R&D in the international setting as well as the impact of funding on R&D productivity in universities. In his current research, he looks to identify the effect of trade policy on the flow of ideas and home-country R&D productivity. His primary expertise lies in using applied microeconometrics to identify causal relationships using large data-sets. Prior to receiving his Ph.D., Justin achieved a M.A. in economics and a B.A. in Business economics from the University of California, Riverside.