July 1986.

Official government statistics on the "mission-distribution" of

U.S. R&D investment are based on the assumption that only the government

sponsors military R&D. In this paper we advance and test the

alternative hypothesis, that a significant share of privately-financed

industrial R&D is military in orientation. We argue that in addition to

(prior to) contracting with firms to perform military R&D, the

government deliberately encourages firms to sponsor defense research at

their own expense, to enable the government to identify the firms most

capable of performing certain government contracts, particularly those

for major weapons systems. To test the hypothesis of, and estimate the

quantity of, private investment in 'signaling' R&D, we estimate variants

of a model of company R&D expenditure on longitudinal, firm-level data,

including detailed data on federal contracts. Our estimates imply that

about 30 percent of U.S. private industrial R&D expenditure in 1984 was

procurement- (largely defense-) related, and that almost half of the

increase in private R&D between 1979 and 1984 was stimulated by the

increase in Federal demand.

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