Government spending composition, technical change and wage inequality

The set of innovation cost-reducing policies introduced in this period basically work through the
following channels: subsidies for R&D, technology transfer, and property rights protection. The
Research & Experimentation Tax Credit established by the Economic Recovery Tax Act of 1981
was aimed at introducing tax subsidies to annual increases in R&D investment. Technology transfer
policies are represented by the Stevenson-Wydler Technology Innovation Act (1980), that required
Federal Laboratories to facilitate the transfer of federally owned and originated technology to the
private sector and to local and state governments. The Small Business Innovation and Development
Act (1982), that established the Small Business Research (SBIR) program within the major Federal
R&D agencies to increase government funding of research with commercialization potential within
small, high-technology companies. The Federal Technology Transfer Act (1986), that amended the
Stevenson-Wydler Act, to authorize cooperative research and development agreements (CRADA)
between Federal laboratories and other entities, including state agencies. Finally, policies to improve
protection of intellectual property rights are the Bayh-Dole Patent Act (1980), which allowed agencies
to issue patents to small business and non profit institutions, including universities, for inventions
made with agency funds; and the Court of Appeals for the Federal Circuit, established in 1982, that
substantially improved the protection of intellectual property right in litigations.

The contemporaneous introduction of this set policies was strongly aimed at creating an insti-
tutional environment that could promote commercial innovation. This constitutes a change in the
structure of U.S. innovation policy, away from the massive spending in military technology of the
post-War period. Mowery (1998) argues that this set of policies represent a “structural change” in
the US. national innovation system. There is sufficient consensus among technology policy scholars
that the post-1980 shift, started during the Reagan and Bush administrations and continued as a
trademark of Clinton’s economic policy, represents a crucial move towards an explicit commercial
innovation policy in the US.⁶

On the demand side, shifts in the composition of government spending towards innovation-intensive
goods can also be seen as part of this structural change in U.S. innovation policy. Although government
spending has never been an explicit policy tool, it has always worked as a de facto relevant innovation
policy instrument. David Hart presents the argument in the following way: “[Public] R&D spending
was typically accompanied by other measures that deserve at least as much credit for their technological
payoffs. For instance, the Department of Defense (DOD) not only funded much of the physical science
and engineering R&D that led to advances in semiconductors and computers, it also purchased a
large fraction of products themselves, especially the most advanced products. The DOD guaranteed
that a market for electronics would exist, inducing private investment on a scale that would not have
otherwise followed even the most promising research results” (Hart 1998 p.1). Hence, according to
this view, public procurement guaranteed a market to innovative firms, especially in early stages of
product development. There is evidence that the DOD, NASA and also other government agencies,
such as the Department of Health, contributed to private innovation via demand-pull (see Ruttan
2003, and Finkelstein 2003).

⁶See Mowery and Rosenberg (1989) and (1993), Ham and Mowery (1995), Krimsky (2003), and Mirowsky and Sent
(2005). For further discussion of the nature and empirical relevance of the shift in technology policy see Impullitti
(2008b).

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