Knowledge spillovers and public investment in innovation: empirical evidence from the United Kingdom

Spillovers constitute the fundamental rationale for public investment in innovation. Unfortunately, it is difficult to directly measure and evaluate spillovers, so we can determine how to most effectively target public investment in innovation in the private sector. This study provides new empirical evidence on spillovers, simultaneously examining the role of geography, internationalization and collaborative R&D. Collaborative R&D is an important mechanism for the transmission of such spillovers. Based on comprehensive longitudinal firm-level UK data, including detailed information on different types of collaborative R&D, we find that access to public finance is a key determinant of a firm’s ability to innovate and generate sales. Another key finding is that a firm’s returns to international collaborative R&D are conditional on its productivity and access to public funding. It also appears that high-productivity firms benefit more from public funding than low-productivity firms, in terms of stimulating innovation. Should they secure public funding, firms also benefit more from regional and international collaboration than they do without such funding. In general, our findings are consistent with the view that the social returns to public investment in private sector R&D are high.