Is Federal Academic Research and Development Subsidy a Complement or Substitute for State Funding? 1

By Wu, Yonghong; Merriman, David | Public Finance and Management, January 1, 2017 | Go to article overview

Is Federal Academic Research and Development Subsidy a Complement or Substitute for State Funding? 1


Wu, Yonghong, Merriman, David, Public Finance and Management


1.INTRODUCTION

In the U.S., the federal government is the primary supporter of academic research and development (R&D). However, state governments have increased financial support for academic research since the 1980s in pursuit of technology-based economic development. The total federally financed R&D expenditures by public doctorate-granting universities2 grew by an annualized rate of 6.8% in 1985-1990, 4.4% in 1990-2000, 5.5% in 2000-2010, and the total federal funding of academic R&D nearly quadrupled in 2012 as compared with 1985.3 The total state and local government financed academic R&D expenditures also show substantial growth: an annualized rate of 8.6% in 19851990, 3.2% in 1990-2000, and 2.5% in 2000-2010. The total state funding grew by 150% in the period 1985-2012.

The involvement of both federal and state governments in funding academic R&D reveals an important facet of fiscal federalism in the science and technology policy arena. This empirical study is intended to examine the relationship between the funding of public academic R&D from federal and state governments. Because federal funding has been growing more rapidly than state funding of public university R&D, the average state share of total government-financed public university R&D expenditures has declined since 1985 from slightly over 20% in 1985 to 18.5% in 1995 and to about 12.5% in 2010.

We further examine data on the annual growth of state public university R&D expenditures financed by federal and state governments from 1985 through 2012. Our empirical analyses employ panel study econometric techniques to explore the effect of federal grant funding on state funding of public university R&D. The model is applied to all fifty states for the time period 1985-2012. The statistical estimates indicate that there is a statistically significant but modest substitution between federal and state funding of R&D at public higher education institutions. A relatively strong substitution effect mostly appears when the growth of federal support is relatively low. In years when the growth of federal funding is high, state governments maintain virtually the same growth rates of their funding, regardless of changing growth of federal support of academic R&D.

This empirical study is intended to improve understanding of state budgetary responses to the varying growth of federal government grant support of academic research. A substitution effect implies not only a potential crowd-out of federal funding on state appropriations, but also stabilization of total funding through increased state support when federal support dwindles. The substitution response becomes stronger in the case of relatively low growth of federal funding. This may suggest that public universities only actively pursue state funding of academic research when there is pressure to do so because of proportionately slow growth or cuts in their federal funding.

2.REVIEW OF EMPIRICAL LITERATURE

Given quite limited research of the relationship between federal and state funding of academic research, we first look at the empirical literature on estimating the effect of various other intergovernmental grants to state and local governments. The majority of empirical studies suggest that intergovernmental grants rarely stimulate additional spending from recipients' own sources on targeted programs. For instance, in an early review by Hines and Thaler (1995), eight of the ten most cited empirical studies report that every grant dollar increases the spending of recipient jurisdictions by less than one dollar (as low as 25 cents), which shows that intergovernmental grants very likely crowd out state and local expenditures that would have been made without the grants. This crowd-out effect is consistent with economic theory. Many economic studies have found that the demand for public services is generally price- and income-inelastic (Fisher, 2007). …

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