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Through a number of different agencies, the U.S. federal government provides research funding to universities and colleges, government-owned laboratories, and for-profit enterprises. Support for basic research at universities is widely accepted and the links to technical progress are well established. A common question regarding the public funding of research conducted by private firms is if the public interest, specifically the goals of technical advance and economic growth, is being promoted and how. After all, a private firm is expected to fund its own research when it perceives a technical opportunity in an area of its core competency in an established market with reasonable profit expectations.

In some cases, however, private firms may not pursue promising technical opportunities for the following reasons:

  • R&D scientific and technical frontiers are risky and the chances of failure are high. 1

  • An individual firm may not have the capabilities required to develop the technology. Complex new technologies may require collaboration and information sharing; however, the cost of establishing research and development partnerships and making them work productively may provide disincentives to undertaking the project.

  • Private incentives may not be sufficient to induce a firm to undertake the project in the face of difficulties in appropriating the resulting benefits, i.e., the resulting knowledge may flow to others who receive the revenues from the R&D without sharing the cost. 2

Public-private R&D partnerships provide a policy instrument that may alleviate these concerns and encourage private-sector investment. A government R&D partnership may provide a catalyst for private firms to undertake research which will have broad-based knowledge benefits for other firms and other industries. Government programs may provide a neutral forum for competitors to work together on mutually beneficial research. 3 In addition, government funding may reduce the cost to the firm of establishing working relationships with R&D collaborators and provide an incentive for firms to undertake partnerships

1 A. N. Link et al., “The Economics of Science and Technology, The Journal of Technology Transfer, forthcoming, note that the traditional distinctions between basic and applied research have become meaningless in the commercialization of complex technologies. Firms may identify research areas that require additional fundamental research.

2 Paradoxically, the profit incentive that motivates innovative activity by an individual firm also discourages information sharing and collaborative R&D activities between companies.

3 An example of productive and profitable research undertaken by public-private partnerships is Sematech. See National Research Council, Conflict and Cooperation in National Competition for High-Technology Industry, Washington, D.C.: National Academy Press, 1996, footnote 19.

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