Friday, October 19, 2018

What impact do government grants have on small tech firms?

Most academic writing on direct government spending as an innovation policy tool focuses on how this mechanism compares with other policies rather than on the policy choices within the "direct spending" box. For example, in Beyond the Patents–Prizes Debate, Daniel Hemel and I considered a single category of "government grants—a category that includes direct spending on government research laboratories and grants to nongovernment researchers"—with a focus on the similarities among these direct spending mechanisms, and what makes them all different from the other tools in our four-box framework (R&D tax incentives, patents, and inducement prizes).

But we noted that there is variation within each policy box, and that in practice the boxes form a spectrum rather than discrete choices. And it is certainly worth diving within each of the four boxes of our framework from Beyond to dissect these policy tools. There is of course an extensive literature already on optimizing within the "patent" mechanism, but legal innovation scholars pay far less attention to the other boxes, including grants.

Even if one focuses on the most typical grants to academic scientists, there is some interesting research on the effect of different ways of awarding this funding, such as this paper by Azoulay et al. on NIH vs. HHMI grants. But the federal government also provides many other types of direct finding: in 2013, almost one-quarter of federal R&D expenditures went to for-profit firms. How does the theory behind this substantial expenditure of taxpayer funding differ from that for academic research, and what impact does it have in practice?

A recent study from Aleksandar Giga, Andrea Belz, Richard Terrile, and Fernando Zapatero at USC and NASA's Jet Propulsion Lab at Caltech provides some data on the Small Business Innovation Research (SBIR) program as administered by NASA. They find that compared with firms that do not receive these grants, "microfirms" (1-5 employees) with SBIR grants are twice as likely to produce patents and generate twice as many patents. They argue that this is unlikely to be due to a selection effect. They also find that the program does not show the same effect for larger firms, and they suggest that the size limitations for the program should be reconsidered.

Giga et al.'s work focuses on just one corner of the extensive field of direct government science funding, but I hope legal scholars will incorporate empirical work like this to provide a richer understanding of this type of innovation policy.

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