Does Government Research Funding to Universities substitute, Complement or leverage Industry Funding?

There is increasing political pressures on universities to raise research funding from industry and contribute actively to economic development. However, whether or not promotion of the so called third mission in universities, of interacting with industry, is effective without government funding remains an open question, and we do not know whether government funding ‘crowds-out’ or ‘crowds-in’ business funding. In this paper we argue that government funding provides universities with the vital resources to carry out research activities whose results can be transferred at a later stage to industry, leveraging private funding. It is inevitable, therefore, that without government support to academic institutions knowledge transfer activities will be hampered, and financial cuts to universities may reduce rather than foster their self-financing capability. The empirical analysis presented in this paper is based on financial data for the whole population of Italian university departments engaged in research in the Engineering and Physical Sciences. Based on a set of probit and tobit cross-section and panel data models this paper investigates the impact of different forms of public funding to university departments, on their abilities to attract private funding.