Public funding fuels US innovation and economic growth

A new Banca d'Italia working paper reveals that government-funded but privately-owned patents, despite accounting for only 2 percent of total patenting, explain approximately 20 percent of medium-term fluctuations in US total factor productivity and GDP growth.

These innovations generate substantial spillovers to business-sector R&D and investment.

In contrast, privately funded patents contribute to aggregate fluctuations with smaller effects.

Publicly owned patents show muted average impacts, even though they are disproportionately represented among highly disruptive innovations, particularly in health and biotechnology.

The study highlights that innovations funded by the National Institutes of Health (NIH) and National Science Foundation (NSF) exhibit the strongest links to subsequent productivity growth.

Furthermore, research institutes and universities prove more effective than for-profit firms in converting public funding into aggregate economic gains.

This underscores the critical role of institutional design in public support for innovation in shaping productivity dynamics and sustaining US economic growth.

The study assesses the macroeconomic impact of the postwar American innovation model, rooted in Vannevar Bush's 1945 vision.

Bush's architecture defined complementary roles: government funding for public interest research, universities for intellectual freedom, and the private sector for commercial application.

This vision led to the creation of the National Science Foundation (NSF) and the expansion of the National Institutes of Health (NIH).

Leveraging detailed categorization of US patents since 1950, the authors construct novel time series distinguishing patents by funding source and ownership.

This approach allows quantification of aggregate effects while tracing heterogeneous transmission channels, complementing existing micro and macro innovation literature.