Guaranteed Markets and Corporate Scientific Research

Firms invest in scientific research to increase their chances of landing lucrative procurement contracts with the U.S. government. This is an important, but understudied channel through which the government encourages corporate research, particularly when other market mechanisms are insufficient. Using data on $2.3 trillion in contracts matched to 4,323 publicly traded manufacturing firms from 1980 through 2015, we estimate the effect of procurement contracts on upstream (scientific publications) and downstream (patents) corporate R&D. We document a positive effect of contracts on publications, and show that the effect is stronger when market incentives are weak. Procurement contracts encourage publications that: (i) are not used in the firm's internal inventions, (ii) spill over to rivals' inventions, and (iii) are not protected by patents. However, the effect has weakened over time, because the U.S. government has emphasized reduced cost and increased efficiency and transparency in contract awards. Following such policy reforms as the Federal Acquisition Streamlining Act of 1994, the share of R&D contracts in all contracts declined from a high of 25 percent in 1998 to 7 percent in 2015, while the share of commercial contracts grew from 6 percent to 14 percent over the same period. Our results imply that the reorientation of government procurement toward commercially proven technologies has contributed to the withdrawal of corporations from participating in scientific research.