Association for Public Policy Analysis & Management

Academic institutions serve as a central venue for R&D activity. Research has found that university R&D creates knowledge spillovers and spurs innovation (Audretsch & Feldman, 1996; Bercovitz & Feldman, 2007; Feldman, 1994; Jaffe, 1989). Research has focused primarily on the relationship between Federal and non-Federal R&D investment, specifically industry funding (Blume-Kohout et al. 2009; Payne & Siow, 2003; Payne, 2001; David et al., 2000; Diamond, 1999). However, university R&D also relies on funding from state & local governments, nonprofits, and their own institutions.  State and local governments and nonprofit organizations each provided between 5.5 and 6.5% of academic R&D funding from 2010 – 2012; slightly more than industry (National Science Foundation, National Center for Science and Engineering Statistics, Higher Education Research and Development Survey).

Research is finding that state governments are directing greater attention toward university R&D to bolster economic activity (Feldman et al., 2013). Meanwhile, nonprofit funding of academic research has been increasing as charities aim to increase research on treatments for diseases (Feldman & Graddy-Reed, 2013). As universities continue to diversify their portfolio of external support, it is essential to consider the relationships between these various sources of funding.

This paper extends our understanding of R&D support by considering a greater range of external sources of university departmental R&D. More specifically, we examine whether Federal R&D investment serves as a complement or substitute for state & local government and nonprofit R&D investment. Signs of substitution would highlight the inhibiting costs related to the applications for Federal grants; signs of complements would suggest that Federal grants serve as a sign of quality; while the null would suggest they support mutually exclusive aims.

To assess the relationship between Federal R&D investments in university departments with other external sources, we apply an Arellano and Bond (1991) model. We use the lagged dependent variable from two previous periods to instrument for the department’s capacity to secure external non-Federal funding and include university fixed effects to control for time-invariant factors that may affect the institution’s ability to secure funding. We run the two-stage model on outcomes of state & local government R&D and nonprofit R&D. In addition, to assess the validity of this approach we also use the outcome of industry R&D and compare the results to previous studies’ findings.

This paper uses university department-level data from the National Science Foundation Survey of Research and Development Expenditures at Universities and Colleges/Higher Education Research and Development Survey. We restrict the sample of universities to all U.S. doctoral-granting academic institutions with a research component, as defined by the Carnegie Classification. While selection bias has been of concern for studies that focus on firm-level R&D investment activity (David et al. 2000), this does not pose a concern for this analysis given that we are looking at the population of U.S. research institutions. This study provides insight into the full funding landscape of academic R&D and addresses how Federal funding impacts a broader set of external funding sources.