An analysis of 1979-1984 panel data for 169 US defense industry firms shows that the federal government promotes research and development (R&D) investment by awarding major contracts through the competitive procurement process. In this process, the government reveals its demand for certain technological innovations and encourages private firms to sponsor the necessary R&D. The firms will recover the R&D expenses by being awarded the government contract. The amount of private R&D investment associated with competitive procurement is large compared to the value of competitive contracts. This occurs because the firm that is awarded the initial government contracts for a weapons system will almost certainly receive numerous noncompetitive follow-up contracts. The empirical evidence indicates that each dollar spent in competitive procurement induces the expenditure of an additional 54 cents in private R&D investments.
Lichtenberg, Frank. "The Private R and D Investment Response to Federal Design and Technical Competitions." American Economic Review 78, no. 3 (June 1988): 550-59.
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