The Effects of Defense R&D on Technological Progress: Resource Diversion Versus Spillover Benefits
McDonough, Matthew David
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It is well known within the study of economic growth that technological progress is a key factor leading to long term gains in the standard of living. However, for much of the history of the theory of economic growth, technological progress was assumed to be exogenous. Only with the advent of New Growth Theory did mainstream economic theory incorporate the fact that technological progress is endogenous, meaning that it is the result of conscious human efforts aimed at producing new technologies. This has resulted in a long line of literature investigating the determinants of technological progress. One issue that has been investigated in this line of literature is the effect that defense related R&D has on general technological progress. Dr. Lloyd J. Dumas, in The Overburdened Economy, 1986, claims that defense R&D diverts resources away from consumer-oriented R&D. Since researchers involved in defense R&D are not devoting their efforts to producing consumer-oriented technologies, Dumas claims that devoting resources with technical expertise to defense R&D will slow the growth of consumer-oriented technologies, thereby reducing a country’s international technological competitiveness. On the other hand, a number of consumer-oriented technologies trace their roots to defense R&D. This study attempts to quantity the effects that defense R&D has on technological progress. The assumption of the model is that defense related R&D will draw resources away from other types of R&D, which is known as the resource diversion effect, but that defense R&D also produces positive spillover effects that increase the productivity of other types of R&D, potentially through the creation of knowledge that is applicable to consumer-oriented technologies. The empirical model will borrow from the national innovative capacity literature, which has developed a model to explain the determinants of national technological progress. This study will further the national innovative capacity literature by introducing the distribution of R&D expenditures across different purposes as an explanatory variable in an attempt to determine if defense related R&D does in fact exhibit resource diversion and positive spillover effects. Additionally, this study furthers the national innovative capacity approach by employing a robust regression technique that is not affected by a large number of outliers in the data, which appears to be a problem with the data that has been used in the national innovative capacity literature.