US government spending since World War II has been characterized by large
investments in defense related goods, services and R&D. In turn, this means that the
Department of Defense (DoD) has had a large role in funding corporate innovation in the
US. This paper looks at the impact of military procurement spending on corporate
innovation among publicly traded firms for the period 1966-2003. The study utilizes a
major database of detailed, historical procurement contracts for all Department of
Defense (DoD) prime contracts since 1966. Product-level spending shifts – chiefly
centered around the Reagan defense build-up of the 1980s – are used as a source of
exogenous variation in firm-level procurement receipts. Estimates indicate that defense
procurement has a positive absolute impact on patenting and R&D investment, with an
elasticity of approximately 0.07 across both measures of innovation. In terms of
magnitudes, the contribution of defense procurement to innovation peaked during the
early Reagan build-up, accounting for 11.4% of the total change in patenting intensity
and 6.5% for R&D. This compares to a defense sector share in output of around 4%. The
later defense cutbacks under Bush Senior and Clinton then curbed the growth in
technological intensity by around 2%
