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Joe Gibbs
Program Eval.
Lindo
Effect of Federal Funding and Policy on Scientific Innovation
The effect of Federal funding on innovation is a very important topic, especially in
present day America. This is due to the fact that nearly 95% of academic research development
comes from the government (National Science Foundation, 2006). In this paper, I aim to survey
some current literature I find pertinent to this topic and then draw conclusions based on the
strengths and weaknesses of these papers. The first paper I will summarize is a paper that is
entitled “Innovation and Climate Change Policy” written by Joshua Gans. The second paper I
will look at is “Impacts of Grants and Contracts on Academic Researchers’ Interactions with
Industry” by Barry Bozeman and Monica Gaughan. Finally, the third paper I survey is “Growing
Stem Cells: the Impact of Federal Funding Policy on the U.S. Scientific Frontier” written by
Jeffrey Furman, Fiona Murray, and Scott Stern. The exploration of these papers will show that
federal funding can have a significant effect on what gets researched and how fast innovation in
that field happens but its effects tend to be limited and less significant over time.
As stated above, the first paper we will look at is “Innovation and Climate Change
Policy.” The goal of this paper was to find out if climate change policies induce innovation in
environmentally friendly technology. It uses a general equilibrium analysis to study the effects of
innovation in alternative fuel technologies and so called “fossil fuel augmenting” technologies,
such as more fuel efficient cars. General equilibrium analyses are purely theoretical thought
experiments. However, they use solid equations and try to make realistic assumptions while

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conceding that they cannot control for all of the variables of an entire industry and government.
This paper’s main focus is studying the effect of emission cap policies. The author first looks at
the effects of a policy change involving a tighter emissions cap on innovation and the direction
of innovation. The paper finds that stronger climate change policies (tighter emissions caps)
weakly reduces the incentives to innovate fossil fuel augmenting technology. The reason for this
is because that innovating augmenting technology is more profitable with higher use of the
original product which is, in this case, fossil fuels and caps reduce the use of fossil fuels. The
author also finds that tighter caps tend to cause higher levels of innovation in alternative energies
that are considered substitutes to fossil fuels but decreases innovation in alternative energies that
are considered complements to fossil fuels.
There are some problems I have with this paper. First of all, “general equilibrium
analysis” is not based on data or real economies. It tends to be an exercise in logic and higher
mathematics making the results tentative at best, not applicable at worst. This is because the
economy of a nation and the rational decisions of individuals and firms are much too difficult
and complex to adequately put into a mathematical equation. However, the author uses a very
simple idea of an economy using monopolists and strong government. Making it much simpler to
obtain internal validity, but it would be very hard to argue that it has any external validity. Even
with this problem, I find the results to be very applicable to our larger topic. It shows that the
government can affect the direction of innovation using policies other than research funding.
This is very important in a modern day America because of the large amount of concern with
governmental debt and suspicion of extra governmental spending in general. The next paper will
study the effect of funding, by government and industry, on innovation.

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The second paper we will discuss is “Impacts of Grants and Contracts on Academic
Researchers’ Interactions with Industry.” This papers attempts to ascertain the impact of
receiving a federal or industry based grant or contract on a researcher’s publishing rate and on
his/her general interaction with industry. The authors use an ordinary least squares analysis to
determine the effects and compare them to the control group. In every model they control for
gender, tenure status, center affiliation, and disciplinary affiliation. The first interesting finding
of this paper is that those researchers with industry grants have significantly higher levels of
industry interaction. However, this paper also finds that having a federal grant also indicates a
weaker but still significant level of industry interaction. The conclusion that the authors draw is
that researchers with grants have higher levels of industry interaction and those who obtain
industry grants have an even higher level of interaction with industry than those with just federal
grants. The main problem with this paper is that it is based on questionnaire results. This means
that it is subject to possible response bias. However, the authors used a wave strategy in
implementing the questionnaires and a high response rate meant that it was easy to compare
response to known population parameters making bias easy to identify. Using these methods, the
authors found that respondents are not significantly different than non-respondents. Another
problem with this paper is that it can seem to be just pointing out a very intuitive effect.
“Researchers with industry grants interact with industry more.” However, these findings are
interesting because it is an independent effect. This means that those with grants are not just the
more effective and interactive researchers, but that getting a grant makes them more effective
and interactive. These findings show that funding, by both government and industry, have a
significant effect on researchers’ interaction with industry. Specifically, the finding that
government grants have a significant effect is very important to modern day government funding

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concerns. This paper shows that government funded research causes higher industry interaction.
The more interaction means faster innovation in industry making the United States economy
stronger.
The final paper I will look at is “Growing Stem Cells: the Impact of Federal Funding
Policy on the U.S. Scientific Frontier.” This paper’s main goal is to use the shock in stem cell
research funding policy in 2001 to find the effect of funding policy on direction of innovation
and the rate of innovation itself. The authors of this paper use a Differences in Differences
analysis strategy to find the effects of these shocks. It also uses an interesting measurement
strategy to study this policy’s effect on scientific innovation. They use a citation based approach
to evaluate this policy. This means they find a “core group” of important research for the
affected branch of research (human embryonic stem cell research) and a non-affected but related
branch of research (RNAi research) before the policy shock; and then count the amount of papers
that cite any paper in the “core group” of innovative research and compare that number to the
control group to measure the effects of the policy shock. This is the identifying assumption of
this paper, that the RNAi research group provides a good counterfactual to our treated group,
human embryonic stem cell research. The advantage of this citation based approach that uses a
core group, as opposed to a regular citations based approach, is that it is a much more accurate
way to track the rate of innovation along already discovered uses. However, the disadvantage is
that it will not account for new “research lines.” The results of this analysis find that stem cell
research sharply declined after the negative policy shock of 2001 and that the impact of this
shock is greatest in 2001. The authors also find that the effects of the shock diminish over time
almost to the point where research levels regain their original before shock level. The authors are
able to draw the conclusion that researchers have some ability to counteract policy changes by

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seeking different sources of funding and out of country partnerships, but that the government can
have a significant effect on innovation through funding mechanisms. This paper has one problem
in my view and it is a relatively weak problem compared to some of the other problems the
previous papers had. The citation analysis strategy is something that seems subjective as to
deciding the “core group” of research papers that they base the rest of the study on. Accidentally,
adding one non-important paper or not including an important one could skew the rest of the
results. However, this paper and its findings are incredibly important to the broader topic of the
effect of the federal government on innovation. This study shows the strength and also the
weakness federal funding has in overall scientific innovation. It shows that federal funding can
have a very significant impact in the short term but in the long term the government does not
have much say due to researcher’s ability to seek out funding from different sources. This shows
that even if the government removes funding from a certain branch of research, scientists are
ultimately responsible for deciding a country’s scientific path.
This brings me to my interpretations of these papers and the effect of federal policy on
scientific innovation in America. All of these papers show a different effect of different policies
that the government enacts. The first paper we looked at showed us a non-funding policy and its
effect on the direction of innovation and on innovation itself. The second paper showed how
receiving funding from government or industry affect researchers’ interactions with industry and
the rate at which they innovate. And the third paper directly showed the effect of a funding
policy change, specifically a removal of funding from a certain branch of research, and its effect
on the rate of innovation in that field and the response that scientists make to this change. These
papers reveal that the federal government has a large effect on innovation in America. They
show us that the government can affect the direction and the rate of innovation in incredibly

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significant ways. However, they also show that different sources of funding can have a larger
effect than federal grants on researcher’s rate of innovation and the speed of which these
innovations become marketable products. Such as the results in the second paper showing the
industry funding and a better effect that government funding did. Also these papers show that the
government may not be powerful enough to dictate the direction of innovation in the long run.
This was shown in the third paper we surveyed. It showed us that although the negative policy
shock to stem cell research had a very large effect in the 3 years after the shock. In the 4
following years, the rate of innovation had almost reached the level of pre-shock innovation.
This tells us that there are various sorts non-federal funding and that this non-federal funding can
have a significant effect as well. Along with the fact that scientist do not just stand by, they
actively seek out partnerships with researchers in countries whose laws are less strict. After
studying these papers, I have found that federal funding and policy does have a great effect on
research and its direction. However, I am not convinced that it is so important that the
government should be providing 95% of America’s academic research budget. Especially when
it seems that scientists are just as able to find other sources of funding. I am also interested in
seeing more research done in comparing the innovation rate of researchers who are industry
funded compared to those who are federally funded. This research will help decide whether
industry or government is more effective when it comes to funding research. This will be
extremely important to know going forward in our government’s current debt and the feeling of
needing to cut spending.

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Works Cited
Bozeman, Barry, and Monica Gaughan. "Impacts of Grants and Contracts on Academic
Researchers’ Interactions with Industry." Research Policy 36.5 (2007): 694-707. Print.
Furman, Jeffrey L., Fiona Murray, and Scott Stern. "Growing Stem Cells: The Impact of Federal
Funding Policy on the U.S. Scientific Frontier." Journal of Policy Analysis and
Management 31.3 (2012): 661-705. Print.
Gans, Joshua S. "Innovation and Climate Change Policy." American Economic Journal:
Economic Policy 4.4 (2012): 125-45. Print.