The Impact Of Public Defence R&D Spending On Private R&D Spending

Recent geopolitical events have triggered a debate about increasing defence expenditures and their broader economic implications. The economic effect is expected to crucially depend, among others, on the extent to which higher public defence R&D spending can crowd in private R&D spending. Focusing on a sample of EU and OECD countries for the period 1981 to 2023, the analysis of this chapter suggests the existence of a crowding-in effect on business expenditures in R&D financed by the private sector, patents and real GDP per capita. The crowding-in effects have long and variable lags. The extent of crowding-in, however, depends on countries’ innovation performance, a factor that comprises the innovation ecosystem, including the quality of the policy environment, education systems, infrastructure, the capacity for knowledge creation and the pre-shock level of public defence R&D spending. This suggests that a common public defence R&D shock may exacerbate the innovation gap between more and less advanced innovators