Government R&D spending may begin lifting economic activity before the spending itself occurs, and before its full technological benefits emerge, according to a study published in The Economic Journal.
The researchers estimate that public R&D can crowd in private R&D and lift economic activity from the outset, with moderate evidence that some of the response begins one quarter before the spending materializes as firms anticipate future government investment.
The findings challenge a long-standing concern among some economists that government spending often discourages, or “crowds out,” private investment. Instead, the research suggests that public R&D frequently has the opposite effect: it “crowds in” additional private investment, creating a stronger innovation ecosystem that supports higher economic growth over many years.
Looking beyond short-term stimulus
Governments invest in many different types of projects, from roads and bridges to schools and hospitals. Research and development is different because its primary purpose is not to produce immediate services but to generate new knowledge that can eventually lead to new products, industries and productivity gains.
That makes measuring its economic impact particularly difficult. A scientific discovery may take years before businesses can transform it into commercial products, while some research never reaches the marketplace at all. Yet history shows that many technologies now taken for granted (including GPS, the internet, semiconductor advances and aspects of modern biotechnology) grew out of sustained public investment before private companies turned them into commercial successes.
To investigate how public R&D affects the wider economy, researchers from the University of Southampton, University College London, the University of Bari Aldo Moro and the World Bank analysed more than 70 years of US economic data, covering the period from 1947 to 2017. Their analysis included government and private investment, tax revenues, GDP and other macroeconomic indicators.
One of the study’s most interesting findings is that the economic response may begin before the government money is actually spent.
The researchers found moderate evidence that private R&D investment can start to rise as businesses anticipate forthcoming public R&D spending. The authors argue that credible long-term commitments can reduce uncertainty and signal which technologies or markets are likely to expand, encouraging companies to move ahead with their own research plans sooner.
In practice, that could mean bringing forward planned research projects or expanding existing R&D, although the study did not track individual company decisions.
Economists have long recognised that expectations influence investment decisions. Businesses often commit millions of dollars to projects that may not generate profits for several years. The more predictable the policy environment, the easier it becomes for executives to justify those investments to shareholders and lenders.
Every public dollar generated much more output
The researchers estimate that every additional dollar associated with a public R&D expansion generated between $2.60 and $4.30 in additional economic output over six years. The effect began much sooner, with some of the increase appearing before the government spending was actually deployed.
Importantly, the study attributes much of this effect to increased private-sector activity rather than government spending alone. Instead of replacing business investment, public R&D often encourages companies to invest more heavily in their own innovation programmes.
Governments may also be better positioned than individual firms to finance research whose commercial rewards are uncertain or may take decades to emerge. Private companies generally focus on projects likely to produce competitive returns within a reasonable timeframe, whereas governments can support more ambitious, high-risk research that creates broad economic benefits extending far beyond a single company or industry.
Public and private investment work best together
One of the study’s central conclusions is that public and private research should not be viewed as competitors. Instead, they often play different but complementary roles in the innovation process.
Governments are generally better equipped to fund research that is expensive, uncertain and unlikely to produce commercial returns for many years. Basic scientific research, for example, often creates knowledge that becomes freely available to many companies. Because no single business can capture all the financial benefits, private firms may be reluctant to finance this type of work on their own.
Businesses, on the other hand, are usually better positioned to transform scientific discoveries into products and services that consumers can buy. They can often move more quickly, respond to market demand and compete to improve new technologies.
The researchers argue that this combination allows public investment to lay the groundwork for innovation while private firms build commercially successful applications on top of that foundation. Rather than replacing business investment, effective public R&D policies can encourage companies to invest more of their own resources. This complementary relationship was one of the main findings of the study.
Lessons for industrial policy
The findings arrive as many governments seek to strengthen domestic industries, improve energy security and remain competitive in fields such as artificial intelligence, advanced manufacturing, biotechnology and clean energy.
Public investment has become an increasingly important policy tool in several countries. In the United States, legislation such as the CHIPS and Science Act aims to expand semiconductor manufacturing and research, while the European Union has increased support for green technologies and digital innovation. Although these programmes differ in design, they share the goal of encouraging private investment alongside government funding rather than replacing it.
The new research suggests that how governments design these programmes may be just as important as how much money they spend. Stable, long-term commitments can reduce uncertainty for businesses, making companies more willing to undertake expensive research projects that may take years to generate returns.
Lead researcher Dr Vincenzo De Lipsis noted that the composition, design and credibility of public investment can be as important as its overall size when governments are trying to rebuild industrial capacity under tight fiscal constraints.
“At a time when governments are seeking to rebuild industrial capacity while operating within tight fiscal constraints, our findings show that the composition, design and credibility of public investment can be as important as its overall size,” said Dr Vincenzo De Lipsis .
“There are many examples of rapid innovation led by public investment, including efforts to develop alternatives to fossil fuels and the recent race to develop COVID-19 vaccines. We wanted to understand how quickly the wider economic effects of public R&D investment materialise, how large they are, and whether they persist over the long term,” he added.
Innovation often produces benefits that spread widely
Economists frequently describe knowledge as creating “spillover effects.” When one company or research institution develops new knowledge, other organisations often benefit as well. Scientists publish findings, skilled workers move between employers, suppliers learn new techniques and competing firms build upon earlier discoveries.
These spillovers help explain why governments have traditionally funded universities, national laboratories and basic scientific research. Without public support, many valuable discoveries might never occur because the original investor would receive only part of the overall economic benefit.
This idea has been supported by decades of economic research. Studies have repeatedly found that social returns from research and development are often substantially higher than the private returns earned by individual companies, providing an economic rationale for public investment in science and technology.
Not a guarantee of success
The authors are careful not to suggest that every public research programme will generate strong economic returns. The quality of project selection, effective management and consistent long-term policy all influence whether investments succeed.
Likewise, public R&D should not become a substitute for private-sector innovation. Competitive markets remain essential for refining ideas, reducing costs and delivering products that consumers actually want.
The study instead argues for balance. Governments can help tackle scientific challenges that individual firms might avoid because they are too risky, expensive or slow to produce profits. Businesses can then apply their expertise to commercialise discoveries more efficiently.
A broader view of economic investment
The researchers conclude that public research and development deserves greater attention as a long-term growth strategy rather than simply another category of government expenditure.
Their analysis suggests that well-designed R&D investment can produce benefits on several fronts simultaneously: encouraging private investment, supporting innovation, raising productivity and expanding economic output over many years. Perhaps most intriguingly, the effects may begin even before laboratories are built or experiments begin, as businesses respond to credible signals about future government commitments.
For policymakers facing slower productivity growth and increasing global technological competition, the findings provide fresh evidence that investing in knowledge can have economic returns extending far beyond the laboratory.
Citation
De Lipsis, V., Deleidi, M., Mazzucato, M., & Agnolucci, P. (2026). Macroeconomic effects of public R&D. The Economic Journal. Advance online publication. https://doi.org/10.1093/ej/ueag061
