Research

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Experimenting with High Tech: The Role of Government R&D Contracts (Job Market Paper)

Startups experiment with technologies, markets, and business models to resolve uncertainty. High-tech startups, especially those operating outside the narrow range of technologies that receive venture capital investments, can turn to the government to fund their experimentation. I examine the effect of experimenting with technologies and applications through government R&D contracts on startup performance outcomes. Using newly assembled data on $101 billion in government R&D contracts awarded to American high-tech startups between 1989 and 2019, I document the effect of experimentation on startup employment and sales. I explore how the effect varies with firm and industry characteristics and test several potential mechanisms. On average, experimenting with applications drives startup growth, especially for firms that are larger and registered in Delaware (which suggests they seek outside capital). This has implications for the level and trajectory of experimentation performed in the U.S. economy, with potentially deep economic consequences.

Guaranteed Public Demand and Corporate Scientific Research (with Sharon Belenzon), NBER Working Paper 28644 (Click here to download the latest PDF)

To incentivize firms to develop innovative technologies, the U.S. government awards R&D contracts that often carry an implicit promise of “guaranteed demand.” That is, firms that demonstrate superior technological capabilities are often rewarded with noncompetitive downstream procurement contracts for the resulting products and services. This is a key difference between R&D contracts and grants. Using newly assembled data on $5.9 trillion in government procurement contracts from all federal agencies matched to U.S. publicly traded firms, we document a crowding-in effect of R&D contracts on upstream corporate R&D: firms co-invest with the government at the R&D stage to increase their chances of landing lucrative downstream procurement contracts. We show that the crowding-in effect has weakened over time as the government has increasingly decoupled R&D contracts from downstream procurement. We discuss possible implications of this decoupling.

The Effect of Public Science on Corporate R&D (with Ashish Arora, Sharon Belenzon, Lia Sheer, and Hansen Zhang), NBER Working Paper 31899 (Click here to download the latest PDF)

We study the relationships between corporate R&D and three components of public science: knowledge, human capital, and invention. We identify the relationships through firm-specific exposure to changes in federal agency R&D budgets that are driven by the political composition of congressional appropriations subcommittees. Our results indicate that R&D by established firms, which account for more than three-quarters of business R&D, is affected by scientific knowledge produced by universities only when the latter is embodied in inventions or PhD scientists. Human capital trained by universities fosters innovation in firms. However, inventions from universities and public research institutes substitute for corporate inventions and reduce the demand for internal research by corporations, perhaps reflecting downstream competition from startups that commercialize university inventions. Moreover, abstract knowledge advances per se elicit little or no response. Our findings question the belief that public science represents a non-rival public good that feeds into corporate R&D through knowledge spillovers.

Media Coverage: The Economist, Marginal Revolution

The Private Value of Innovating for the Government (with Elia Ferracuti and Sharon Belenzon)

We quantify the private value of government R&D contracts awarded to firms and demonstrate that R&D contracts not only provide funding for innovation but also carry an implicit promise by the government to buy the resulting products and services from the successful R&D contractor in the future. We estimate the value of this promise to buy by measuring stock market reactions to news about contract awards. Our data cover all R&D contracts awarded by federal agencies to publicly traded American firms between 1984 and 2015. We find that the average value of an R&D contract is 19 times greater than the total potential revenue from the contract itself. However, contract values are highly skewed, with only 17% of sample firms receiving at least one top-quartile contract. The private value of R&D contracts is tied to future production contracts, especially those awarded without competition. This relationship is stronger for large firms that possess both scientific and manufacturing capabilities. This finding underscores the premise that a procurement regime that bundles R&D and production contracts is more favorable for large, integrated firms.

Work in Progress

Bundling Upstream Research with Downstream Production (with Sharon Belenzon, Honggi Lee, and Jungkyu Suh)

The Role of Startups in Translating University Science (with Sharon Belenzon and Sharique Hasan)