Directed, mission-oriented innovation policies create multiplier effects that crowd in private investment and produce superior innovation

Our findings show that mission-oriented innovation policies generate a larger and positive effect both on the level of GDP and on private R&D investment, as compared to generic public expenditures. The high value assumed by the cumulative multiplier on impact and after four quarters might be motivated by the fact that mission-oriented innovation policies are based on contracts, partnerships and cooperative agreements between public-private organizations, which all reflect the focus these projects have on well-defined objectives (Mowery, 2010, 2012). The launch of this kind of public program requires a co-investment between the private and public sectors to finance the large fixed initial costs, such as new physical structures (e.g. laboratories and equipment), the payment of highly skilled labor and the related research activities. A higher multiplier effect could be also motivated by the fact that a great part of R&D expenditure is salary payments for R&D workers (Goolsbee, 1998), who have a higher marginal propensity to consume compared to profits’ earners. Moreover, the massive peak effect of the cumulative multiplier on impact and the dynamics of the cumulative effect in the subsequent periods (see Table 4) are in line with Perotti's (2004) findings, showing that the cumulative multiplier associated with total public investment in the US generates a peak effect on impact and declines in the subsequent time periods. Finally, the positive effect on private R&D produced by mission-oriented policies is significant on impact, whereas the effect of generic public expenditures is lower and becomes significant only after seven quarters. This confirms the idea that targeted innovation policies produce a strong and direct effect on the R&D investment decisions of firms, leading to new directions for technical change.

To sum up, our findings confirm the theoretical intuitions argued in Section 2 as well as in Deleidi and Mazzucato (2019). Specifically, mission-oriented innovation policies are able to produce a larger fiscal multiplier and to determine a stronger direct crowd-in effect than generic public expenditures. The crowd-in effect estimated on private R&D is in line with the findings put forward by Moretti et al. (2019). Conversely, our findings are in contrast with the idea that military R&D expenditures generate a crowding-out effect on private R&D investment (see, among others, Goolsbee, 1998; Wallsten, 2000; Bronzini and Iachini, 2014). Finally, consistent with the recent hysteresis literature (Yellen, 2016; Fatás and Summers, 2018), our findings show that changes in government spending produce positive and permanent effects on the output level.

5. Concluding remarks

In this paper we propose a theoretical macroeconomic model that combines the Sraffian supermultiplier framework, which sees GDP growth as determined by the rate of growth of the autonomous component of demand, with the Neo-Schumpeterian framework, which underlines the relevant role of the state in shaping and directing innovation. The model combines the multiplier and accelerator effect, and analyses the macroeconomic effect generated by alternative fiscal policies by showing that expansionary fiscal policies generate a permanent and positive effect on the output level. In the model, private investment in R&D is introduced and positively related to the classes of public expenditures oriented to promoting structural change, as in the case of mission-oriented innovation policies. A permanent increase in public expenditures, targeted toward strategic sectors and focused on the promotion of innovation and mission-oriented innovation policies, generates the largest effect in terms of output and investment growth. By directly stimulating private business expenditure in R&D, such public policies create the largest supermultiplier and the largest effect on private investment.

Additionally, an SVAR model is estimated for the US economy for the 1947–2018 period to assess the effect on GDP and on private investment in R&D of mission-oriented innovation policies and generic government expenditures. Following Mowery (2010), mission-oriented innovation policies are approximated through defense R&D expenditures. Our estimates show that mission-oriented innovation policies generate a larger effect on the level of GDP than generic public expenditures. Similarly, such results are confirmed when the responses of private investment in R&D are estimated to different fiscal policy shocks: mission-oriented policies produce a stronger crowding-in effect on private R&D investment than generic public expenditures. Specifically, the estimated impulse response functions show that: (i) mission-oriented innovation policies generate an impact multiplier of 23.957 and a peak effect on GDP equal to 54.941, as well as a response of private investment in R&D of 0.745 on impact, which reaches a peak effect of 6.015; and (ii), conversely, generic public expenditures produce an impact multiplier of 0.741 and a peak effect of 1.866 as well as a non-significant effect on R&D on impact and a significant peak effect of 0.09. Our results confirm the thesis argued by the supporters of the hysteresis perspective, which states that aggregate demand and then fiscal policies produce permanent effects on the level of output (Yellen, 2016; Fatás and Summers, 2018).

Our findings suggest that governments should implement expansionary fiscal policies because they generate Keynesian effects, namely positive and permanent effects on GDP and on investments, both in the short and the long run. However, in addition to what the IMF (2014) affirms in a paper entitled ‘Is It Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment’, we believe that fiscal policies should not stop at ‘shovel-ready projects’ but be targeted toward the financing of mission-oriented innovation policies, as these will help solve problems while having a higher impact on output and investment growth. While the paper used Cold War military investments as the proxy for missions, modern mission-oriented policies are those aimed at societal challenges (Mazzucato, 2018a, 2018b). As Richard Nelson argued in his book The Moon and the Ghetto (Nelson 1977, 2011), these societal problems are even harder to address than purely technological ones, as they involve political, behavioral and regulatory changes. However, they are just as, or more, important as they help steer capitalism itself in a way that produces inclusive and sustainable growth. By looking at the multiplier of goal-oriented policies that stimulate cross-sectoral investment and innovation, the paper helps to go beyond the dichotomy between austerity policies and those aimed at infrastructure (Mazzucato and Skidelsky, 2020). These policies have the potential to kill two birds with one stone: to combine the standard Keynesian effects with those produced by the development and diffusion of directed innovation in the economic system.