The Effect of Public Science on Corporate R&D (w/ A. Arora & S. Belenzon & L. Cioaca & H. Zhang)

We explore the relationship between corporate R&D and the different components of public science: knowledge, human capital, and inventions. We identify the relationships through firm-specific exposure to changes in federal agency budgets that stem from the congressional appropriations process. 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; abstract knowledge advances per se elicit little or no response.  Furthermore, the effect of university research on corporate R&D is nuanced. University inventions substitute for corporate inventions and reduce the demand for internal research by corporations. On the other hand, the human capital trained by universities fosters innovation in firms. These offsetting effects suggest that public science substitutes for R&D in established corporations. We conjecture that the substitution reflects downstream competition from startups that commercialize university inventions. Our findings question the belief that universities generate a non-rival public good, which in turn leads to cost reductions in corporate R&D through knowledge spillovers.