This study analyzes the effects of public and private research and development (R&D) on private-sector output, employment, and investment using a multivariate time-series approach. This approach follows the conceptual argument that dynamic feedbacks are essential to understanding the relationship between public-funded R&D and private-sector performance. With this approach, the authors are able to measure the total effects of public and private R&D on private output. The results suggest that in the long term, public R&D does not affect employment but crowds in private investment, whereas private R&D is a substitute for both. As a consequence, the long-term effects of public R&D on output are positive and substantial, whereas the effects of private R&D are at best marginally positive. As a corollary, the authors argue that public R&D should be brought into the limelight as a leading candidate for explaining the growth slowdown in the past decades.
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