Do companies benefit from public research organizations? The impact of the Fraunhofer Society in Germany

Among available policy levers to boost innovation, investment in applied research organisations has received little empirical attention. In this paper, we analyse the case of the Fraunhofer Society, the largest public applied research organization in Germany. We analyse whether project interaction with Fraunhofer affects the performance and strategic orientation of firms. To that end, we assemble a unique dataset based on the confidential Fraunhofer-internal project management system and merge it with the German contribution to the Community Innovation Survey (CIS), which contains panel information on firm performance. Using instrumental variables that exploit the scale heteroscedasticity of the independent variable (Lewbel, 2012), we identify the causal effects of Fraunhofer interactions on firm performance and strategies. We find a strong, positive effect of project interaction on growth in turnover and productivity. In particular, we find that a one percent increase in the size of the contracts with FhG leads to an increase in growth rate of sales by 1.3 percentage points, and to an increase in the growth rate of productivity by 0.8 percentage points in the short-run. We also provide evidence of considerable long-run effects accumulating to 18% growth in sales and 12% growth in productivity over the course of 15 years. More detailed analyses reveal, amongst others, that the performance effects become stronger the more often firms interact with Fraunhofer and that interactions aiming at generation of technology have a stronger effect than interactions aiming merely at the implementation of existing technologies. Finally, we provide evidence on the macroeconomic productivity effects of Fraunhofer interactions on the German economy. Our results indicate that doubling Fraunhofer revenues from industry (+€ 0.68 bn.) would increase overall productivity in the German economy by 0.55%.