Kellogg School of Management at Northwestern University

John Van Reenen
Gordon Y Billard Professor in Management and Economics, Sloan School of Management, MIT

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When investing in research and development (R&D), institutions must decide whether to take a top-down approach – soliciting a particular technology – or a bottom-up approach in which innovators suggest ideas. This paper examines a reform to the U.S. Air Force Small Business Innovation Research (SBIR) program that transitioned from “Conventional topics,” which solicit highly specific technologies in a top-down approach, to “Open topics,” which invite firms to suggest any new technology that may be useful to the Air Force. The reform seeks to address challenges facing military R&D, in particular a less innovative and more concentrated defense industrial base. We show that the Open program attracts new entrants, defined as younger firms and those without previous defense SBIR awards. In a regression discontinuity design that offers the first causal evaluation of a defense R&D program, we show that winning an Open award increases future venture capital investment, non-SBIR defense contracting, and patenting. Conventional awards have no effects on these outcomes but do increase the chances of future defense SBIR contracts, fostering incumbency. The results suggest that government (and perhaps private sector) innovation could benefit from more bottom-up, decentralized approaches that reduce barriers to entry, minimize lock-in advantages for incumbents, and attract a wider range of new entrants.

Suggested Readings:

“Opening up Military Innovation: Causal Effects of ‘Bottom-Up’ Reforms to U.S. Defense Research”