Dual-Use Investments

From Greg Aharonian of the Internet Patent News Service:

There is a lot of talk in government and industry circles about dual-use investments by various government agencies, direct investments/subsidies by government agencies, and in general having the government act as a venture capitalist. In particular, much attention is focused on the Department of Defense, which has been involved in such activities for decades.

Missing from all of these discussions is any critical analysis of the ability of our government, or any government, to outperform the marketplace (venture capitalists, stock markets, etc) in investing in profitable and sustainable technologies. Unfortunately there is little comprehensive data to analyze these activities, and few intimately familiar both with government activities and the operations of the marketplace (and independent of both).

Two studies I have come across conclude that much dual-use investment has little effect on the general US economy, and suggest that maybe it would be better for the government to influence such activities through lower tax rates (or specialized tax incentives), instead of taxing and then redistributing the money.

The first study appeared in the journal Scientometrics in an article titled "The Impact of Warfare on the Rate of Invention: A Time Series Analysis of United States Patent Activity" (Vol 3, No. 6, 437-455, 1981), with the following abstract:

The outbreak of war is generally thought to shift the fields in which research is conducted. As a result, military conflict has historically been credited with being the catalyst which has caused decisive technological advances. It is also generally suggested that warfare has a systematic impact on the intensity of inventive activity. Most scholars have claimed that wars increase inventiveness, although a few argue that conflict is a hindrance to research. This question has not received extensive empirical examination.

Using United States data, we show that a basic pattern is repeatedly observed. Immediately after the outbreak of a war, there is a significant decline in inventiveness, which is followed by a marked surge. The average net result is a virtual negation of the two trends.

The second study appeared in the journal IEEE Transactions on Engineering Management, Volume 40, Number 2, May 1993, in an article titled "Defense R&D, Technology and Economic Performance: A Longitudinal Analysis of the U.S. Experience", with the following abstract:

This paper examines the issue of the impact of defense expenditure from a different perspective, i.e., in terms of the direct relationships between defense R&D and economic performace as well as the indirect relationships via the development of (1) technical and scientific skills and (2) new technology. The model was estimated for the period 1955-1988 on a time-series set measured as elasticities. The effect of defense R&D is observed particularly through technological change as measured by the number of patents granted to U.S. organizations and individuals. There is no statistically significant evidence of resource diversion or "crowding effect" on the civilian economy due to defense R&D.

Similarly, there does not seem to be any statistically visible evidence of direct effect from defense R&D to the economy. Interestingly, the non-R&D aspect of defense spending appears to have no statistically significant effect on the major components of civilian economic performance, technical skills formation or technological change. From a policy point of view, this suggests that technical spillovers may be limited to a specific kind of defense spending and not to defense spending in general. Another interesting implication is the rivalry between R&D and non-R&D defense spending in favor of the latter.

These articles suggest that at the gross macroeconomic level, explicit government effects on business formation through technology investment, as measured by invention rates reflected in patent data, are marginal at best. Not to say that the research and development funds that the government tries to invest don't lead to significant new discoveries (I'm thinking of the many academic discoveries done by people on NSF funding for example), or that government purchases don't help new technologies (the microprocessor for example), but rather that explicit efforts (such as those war related as above) to achieve such results probably have little effect.