Public R&D subsidies, outside private support, and employment growth

In the aftermath of the passage of the American Recovery and Reinvestment Act of 2009, the employment effects of public subsidies have been scrutinized because of new emphasis on public accountability and transparency. In this paper, we investigate conditions in which public subsidies of research and development (R&D) in small firms stimulate employment growth. We find, based on an empirical analysis of employment growth induced by US Department of Defense Small Business Innovation Research program awards, that the stimulated employment growth is greater under two conditions: one, the presence of outside investors providing additional funding for the R&D and, two, when an exceptional amount of intellectual property is created by the publicly subsidized R&D. In addition to outside investors, other firms that make commercial agreements with the subsidized firm appear important for the employment growth of the subsidized firm. Cooperation between the small business doing the R&D and other firms is an important determinant of the commercial success of the technologies created with the support of public funds.