Government RD Funding in Economic Downturns: Testing the Varieties of Capitalism Conjecture

Abstract

People and governments tend to have shorter time horizons when faced with economic uncertainty. Scientific discoveries and technological innovations requiring long-term commitment and investment are thus likely to suffer from higher rates of future discounting in times of economic insecurity. At the same time, governments are pressed for counter-cyclical measures in economic downturns, since recessions create large demands for compensatory spending for people and sectors at risk. This study explores how government investment in science and technology responds to economic downturns with a panel analysis of the data from 21 OECD nations for the period 1981-2011. Drawing on the varieties of capitalism (VoC) theory, the study explores how institutional complementarities underlying different regimes of political economy influence the downturn behavior of government-funded RD. The empirical evidence presented here is largely supportive of the VoC conjecture, showing that government RD funding is distinctly counter-cyclical in coordinated market economies.