Independent report

To what extent does public R&D leverage private capital investment? (executive summary)

Published 28 November 2025

Executive summary

Context and rationale for the study

Public investment in research and development (R&D) is widely recognised as a key driver of innovation, productivity, and long-term economic growth. Governments fund R&D to stimulate knowledge creation, de-risk technological development, and generate wider economic benefits. While the effects of public R&D on private R&D have been well-documented, the broader question of whether public R&D also incentivises private capital investment—investment in physical assets like infrastructure, equipment, and embedded technologies—remains underexplored.

This question matters because capital investment is critical to productivity. Technological innovation can raise aggregate productivity if it is embodied in new capital or business processes. For public R&D to deliver its full economic potential, it must not only produce new knowledge but also catalyse business investment in tangible and intangible assets that bring innovation into real-world application.

In the UK, the gap between research excellence and economic performance has long been a concern. Despite a strong science base, levels of private capital investment have lagged behind international peers. Understanding the extent to which public R&D investment can “crowd in” private capital is crucial for informing strategies aimed at unlocking private sector-led growth.

Our approach

To examine how public investment in R&D influences business investment in capital—such as machinery, equipment, intellectual property products (R&D, mineral exploration, software, and databases), and infrastructure—we drew on both UK-specific data and a broader international dataset. Our aim was to assess whether public R&D acts as a catalyst for private investment, how this relationship develops over time, and how the UK compares to other advanced economies.

We began with a time series analysis of UK data, looking at how public R&D spending might influence private capital investment in the short and long term. However, the limited number of annual observations restricted the strength of conclusions we could draw from this approach alone.

To overcome this, we conducted a more comprehensive analysis using data from 35 OECD countries over nearly three decades. This cross-country approach enabled us to compare the UK’s performance and identify broader trends. We applied a dynamic panel model known as system GMM, which accounts for investment behaviour over time and helps address potential two-way relationships between public R&D investment and private capital investment. Private capital investment is measured as Gross Fixed Capital Formation (GFCF) by the corporate sector, encompassing both financial and non-financial corporations.

We controlled for other key economic factors—including GDP growth, employment, interest rates, and market structure—to help our findings reflect the specific influence of public R&D. To improve reliability, we used internal and external instruments, including patent data linked to public funding, to isolate the effect of public R&D investment.

Although this analysis does not capture all sector-specific or policy-level differences, it aims to provide high-level evidence on how public R&D can contribute to business investment and, by extension, wider economic activity.

What is the effect of public R&D investment on private capital investment?

It is important to note that this is a novel and exploratory analysis, subject to inherent limitations and uncertainty. As such, the findings should be interpreted as indicative rather than definitive. We see this as a foundation for further work and are keen to refine the methodology and expand the data sources in future research to improve the robustness and reliability of the estimates.

We attempted to assess the delayed impact of realised technological change driven by public R&D through private capital investment; however, data limitations restricted the number of possible lags in public R&D spend to three years. This is unlikely to be sufficient to capture technological changes driven by public investment. Therefore, this report only examines the immediate business investment response to public R&D spend and its subsequent impacts through capital investment persistence.

Table 1 below summarises the core findings from the panel data analysis, highlighting the estimated short- and long-run impacts of a one-off increase in public R&D investment, alongside the persistence of private capital investment.

• Short-run effect (UK): A 1% increase in public R&D spending is associated with a 0.15% to 0.20% rise in private capital investment within the same year. This immediate responsiveness suggests that firms view public R&D as a signal of opportunity, adjusting quickly by expanding their investment in capital assets.
• Long-run effect (UK): Over a 10 to 16-year period, persistence roughly doubles the short-run effect. A one-off 1% increase in public R&D in the first year leads to a 0.58% to 0.68% cumulative rise in private capital investment. By model design the investment response is front-loaded—most of the effect occurs in the first 5 years, with diminishing influence thereafter.
• Persistence: The key mechanism behind the long-run effect is the strong persistence of private capital investment. With 65% to 77% of prior-year investment levels carrying over into the current year, initial responses to public R&D funding continue to shape firm behaviour well beyond the year of the initial intervention. This compounding effect highlights the importance of dynamic modelling in capturing the full economic value of R&D policy.

Table 1: Estimates of the effect of public R&D investment on private capital investment

Effect Type	Definition	Impact Range	Interpretation
Short-run effect (UK)	Associated impact within the same year.	0.15 to 0.20	A 1% increase in public R&D spending is associated with a 0.15% to 0.20% rise in private capital investment within the same year.
Long-run effect (UK)	The impact of the short-term effect combined with persistence.	0.58 to 0.68	An aggregate impact from year 1 to year 16, during which a 1% increase in public R&D investment leads to a cumulative rise of 0.58% to 0.68% in private capital investment. The bulk of this effect is concentrated in the first five years.
Persistence (Private Capital Investment)	The extent to which last year’s capital investment affects this year’s investment.	0.65 to 0.77	A persistence rate of 65% to 77% indicates that most of this year’s private capital investment is carried over from last year, with two-thirds to three-quarters of past investment influencing current levels.

These findings suggest that public R&D investment may act as a catalyst for broader business investment in capital formation. It appears that in the short term, it sends a signal which prompts firms to increase capital spending—an effect that is immediate, statistically significant, and consistently observed across all model specifications. Over the longer term, public R&D sets off a chain of investment decisions that accumulate gradually, delivering returns well beyond the year of initial expenditure. The full scale of the effect builds over time, reflecting the persistent nature of investment behaviour. The long-run estimate, derived from the model’s dynamic structure, assumes that current patterns of investment persistence continue into the future. It should therefore be interpreted as an indication of the potential scale of cumulative returns, conditional on stable policy frameworks and supportive economic conditions.

How does this relationship evolve over time, and what is the scale of its long-term impact?

Due to investment persistence, the relationship between public R&D investment and private capital investment is dynamic and evolves over time. A one-off 1% increase in public R&D triggers an immediate rise in private capital investment, followed by a gradual decline in impact. The results also show that of the response concentrated in the early years and largely tapering off within 10 to 16 years (see Figure 1 below).

Figure 1: Time profile of the impact of public R&D investment on private capital investment

^{Note: This chart shows the non-cumulative impact of a one-off 1% increase in public R&D investment on private capital investment over time. Each point reflects the marginal effect in a given year, based on model estimates. The chart illustrates that the response is strongest in the first year and diminishes gradually, with the effect largely dissipating after 10–17 years. The shaded area captures the range of estimated impacts across different model specifications.}

How does the UK compare to other advanced economies in leveraging public R&D to stimulate business investment?

Figure 2 shows how public investment in R&D influences business investment across OECD countries—both in the short term and over the longer run. In the UK, the short-term impact is estimated at 0.19, matching the OECD average and outperforming countries like Italy (0.16), Spain (0.18) and the Netherlands (0.17). This means UK businesses appear to respond at the average rate when government increases R&D funding, boosting their own investment in capital assets such as machinery, infrastructure, and technology.

However, due to differences in investment persistence, the long-term effect in the UK is lower than in many leading economies, with a cumulative impact of 0.56 compared to 0.68 across the OECD, and over 0.80 in countries like Germany, Japan, and the United States. In these countries, public R&D investment appears to spark more sustained private capital investment over time, as business investment is more persistent.

This suggests that while the UK’s public R&D spending is effective at generating an immediate business investment response, there is scope to improve the persistence of this investment. The observed persistence reflects the fact that capital investment decisions tend to build on past activity. Public R&D appears to influence this trajectory by prompting firms to initially invest, but sustaining that investment over time likely depends on broader business conditions that influence persistence.

Figure 2: Time profile of the impact of public R&D investment on private capital investment

Role of foreign public R&D and other macroeconomic factors

Interestingly, the estimated effect of public R&D funded by foreign governments   and performed abroad on UK private capital investment is statistically significant and comparable in magnitude to that of UK public R&D. This is a surprising result and while international knowledge diffusion may play a role, the results could also reflect broader global investment trends, measurement issues, or modelling limitations. The precise mechanisms behind this relationship remain uncertain. This pattern is not unique to the UK. Foreign public R&D is positively associated with private capital investment across most OECD countries.

We also examined the role of broader macroeconomic conditions. Employment growth consistently emerged as a key driver of higher private capital investment, while interest rates and market concentration showed more variable or limited effects. These findings suggest that the effectiveness of public R&D in stimulating private investment depends not only on the volume of spending but also on the wider economic context in which it occurs

Limitations

While the study makes some contributions, it also faces several limitations:

1. Data constraints (UK time series): The UK-specific time series analysis was constrained by the limited number of annual data points, weakening the ability to estimate robust, time-dependent effects. This led to a greater reliance on cross-country panel methods.
   
2. Annual frequency: The use of annual data limits the granularity of analysis. Quarterly data, like that available in the US, would allow for better identification of short-term lags and more precise timing of investment responses.
   
3. Macro-level focus: The analysis is conducted at the aggregate national level. While this provides valuable insights into economy-wide effects, it does not capture sectoral differences or firm-level heterogeneity in investment behaviour.
   
4. International comparability: Exchange rate fluctuations and differences in national accounting practices may introduce noise into cross-country comparisons, despite efforts to harmonise data.
   
5. Unobserved structural barriers: The analysis identifies that the UK underperforms in sustaining long-term investment responses, but does not fully unpack the institutional, financial, or policy barriers responsible for this.

Despite these limitations, the study provides early evidence that public R&D investment may crowd in private capital investment, with effects that continue to accumulate. While exploratory, the findings support the view of R&D policy as a lever for both innovation and long-term growth. Looking ahead, further research could build on these results by refining the methodology and using more granular data—disaggregated by asset type, sector, and region—to better identify where public R&D exerts the greatest influence. Separating technology-related capital formation from other investment types and linking public R&D to firm-level and place-based outcomes, would enable more precise estimates and support the development of more targeted, effective policy interventions. Such work would also help illuminate the channels through which public R&D shapes investment behaviour and the conditions under which its impacts are strongest.