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Recent Research: Local Impacts of Federal R&D Investments

November 10, 2016

As the United States undergoes a political transition, much remains to be seen in how the Trump Administration will approach the economy. One way to support economic development on both a federal and regional level is by leveraging research and development. Building capacity for scientific research is an underlying principle of the Innovative Science and Technology for Economic Prosperity (iSTEP) model – a comprehensive policy platform for converting the United States’ strength in R&D into greater economic prosperity – which has received bipartisan support from an overwhelming majority of voters.  Roughly three-fourths of prospective voters in the 2016 presidential election support increasing federal funding for research, according to bipartisan polling supported by the Innovation Advocacy Council, an initiative of SSTI.  Recent research also shows that scientific R&D grants distributed at the federal level can have significant effects on regional economies.

In her seminal 2005 book, Cities of Knowledge: Cold War Science and the Search for the Next Silicon Valley, Stanford professor Margaret O’Mara argues that federal funding for science and technology – especially around defense – was critical to the development of some of America’s most notable tech centers such as Silicon Valley, Boston, Austin and the Research Triangle. Overall, O’Mara finds that “cities of knowledge” are: a product of increased spending on “big science” and defense technology during the Cold War; rooted in university-centered economic development policies; and, heavily reliant on local political and economic contexts.  

Federal resources have been less available, however, for the knowledge capitals of the future –especially recently. Each year since the end of the American Recovery and Reinvestment Act (ARRA) stimulus package, funding for research and development has declined. Funding decreased 12.2 percent from FY 2011 to FY 2015, when it reached $113.1 billion, according to new data from the National Science Foundation (NSF). Universities in particular have been hit hard by this decline, with federal funding for higher education R&D declining 11 percent since FY 2011, the longest multiyear decline since the NSF began collecting the data in FY 1972.

Every congressional district has at least one college or university, and approximately one out of every 40 U.S. workers are employed by an academic institution, according to the Wall Street Journal. Beyond the direct impacts of these schools, there are also indirect benefits on regional economies. Recent research has revealed that federal funding for scientific research can spur regional economic development in three ways that practitioners might not have considered: by attracting follow-on funding into the region; by supporting local businesses, particularly high-tech businesses, through vendor and supplier relationships; and, by inducing knowledge spillovers.  

The Domino Effects of Federal Research Funding, a June 2016 article by authors Lauren Lanahan, Alexandra Graddy-Reed and Maryann Feldman, presents substantial evidence that scientific R&D funding from the federal government can help to attract follow-on investments at academic institutions in the United States. Through an empirical analysis, the authors find that a 1.0 percent increase in federal research funding is associated with: a 0.4 percent increase in nonprofit research funding; a 0.2 percent increase in state and local research funding; and a 0.5 percent increase in industry research funding. In addition to supporting investments at the local level where research is being performed, federal funding for scientific research can leverage funding from other sources.

For example, Ohio State University received $255.4 million in federal obligations for research and development in FY 2014, according to the NSF. Broadly applying the authors’ empirical model to this case, if this amount of federal funding were, in theory, to increase by 1.0 percent ($2.55 million), that increase could be associated with, all else equal, an additional: $510,800 in state and local research funding; $1.0 million in nonprofit research funding; and, $1.3 million in industry research funding. These domino-effects are not only important to the university as a whole, but also to the community in which it is located.

A recently released working paper from the Center for Economic Studies at the Census Bureau, finds evidence that federal funding for R&D can also impact local economies. In Research Funding and Regional Economies, the authors use new micro-data from France, Spain and the United States to examine the geographic distribution of how grant funds for research and development are used. The authors find that grant funds are more likely to be expended at businesses physically closer to universities than at those farther away. Additionally, the authors find evidence that if vendors have been a supplier to a grant once, they are subsequently more likely to be a vendor on the same or on related grants, and that if a firm supplies a research grant at a university in a given year it is more likely than other firms to open an establishment near that university in subsequent years.

Through a collaboration with the Big Ten Academic Alliance, the authors analyze UMETRICS data from eight public research universities located throughout the Midwest that collectively account for more than 10 percent of the United States’ federal academic R&D expenditures. In the United States, the authors find significant evidence that establishments that are closer physically to universities are disproportionately more likely to be vendors to a university’s researchers. An establishment within 25 miles of each university has about a 0.2 percent chance of being a vendor, a probability that drops to about 0.1 percent if the establishment is between 25 and 100 miles away, the authors note. The authors also find evidence that firms that act as vendors to universities are more likely to locate new establishments near universities where they have done business, a relationship that is stronger based on the size of a transaction’s value. Firms opening new establishments in a given year are more likely to be near universities where they do business.

Given the importance of federal funding for research and development at the local level, several steps can be taken to help make the most out of these investments. As a way to inform the new president’s transition, Scott Andes of the Brookings Institution released his views on Maximizing The Local Economic Impact of Federal R&D. In general, Andes makes three recommendations on how to improve the economic return on investment of federal R&D: developing a network of applied R&D facilities for the department of defense; establishing regional consortia and entrepreneurs in residence at the Department of Health and Human Services; and, expanding off-campus microlabs and small business vouchers within the Department of Energy. Ultimately, these recommendations would help to ground federal investments in research and development, Andes argues, and increase the competitiveness of both the U.S. and its regions.

Beyond the local impacts of research and development, there are larger forces at play. Included in iSTEP is a call for increased basic research to solve some of the world’s most pressing issues, such as cures for disease, a more sustainable future, and expanding the boundaries of knowledge. The initiative would also: implement a new research transformation program that would bolster regional strategies to convert research into new products and services; increase funding for new Manufacturing USA centers and support greater involvement of small businesses in the institutes; and, expand programs that build federal-local-private partnerships around innovation and R&D, such as the Small Business Administration’s Regional Innovation Clusters and Department of Energy’s Small Business Voucher program. Ultimately, a strong case can be made that research and development is imperative to economic prosperity – at both the national and local level.