The Effect of Government Defence R&D on Business R&D: Evidence from European NATO Members

Abstract

The 2025 pledge of NATO members to allocate 5 percent of GDP on defence sparks debate about the composition of such expenditures. As defence R&D is already part of the defence budgets, this thesis examines whether govern- ment spending on defence R&D crowds in private sector investment into R&D in European NATO members. For this, an unbalanced panel of 24 countries over the period 2005-2023 was adopted. Models with and without a lagged dependent variable, including individual and time e!ects, were estimated us- ing fixed e!ects, dynamic OLS and Arellano-Bond estimators. Employed tests identify most variables as integrated of order one; however, detected cointe- gration among the variables justifies the use of estimators based on OLS. The defence R&D variable is found statistically insignificant with all but one esti- mator, with the dynamic OLS estimate being significant and negative, suggest- ing crowding-out. Other findings indicate government expenditure on civilian R&D and direct funding of business R&D projects have a positive e!ect on pri- vate R&D investments. The results, supported by robustness checks, are not su"cient evidence for a crowding-in e!ect in the European context, although limitations arising from panel dimensions and endogeneity among variables warrant cautious interpretation....

CHARLES UNIVERSITY FACULTY OF SOCIAL SCIENCES Institute of Economic Studies The Effect of Government Defence R&D on Business R&D: Evidence from European NATO Members Bachelor's thesis Author: Filip Tomášek Study program: Economics and Finance Supervisor: Aleš Bělohradský, Ph.D. Year of defence: 2026 Declaration of Authorship The author hereby declares that he or she compiled this thesis independently, using only the listed resources and literature, and the thesis has not been used to obtain any other academic title. The author grants to Charles University permission to reproduce and to dis- tribute copies of this thesis in whole or in part and agrees with the thesis being used for study and scientific purposes. During the preparation of this thesis, the author used Claude Sonnet 4.6 devel- oped by Anthropic in order to debug analysis code, create LaTeX tables and check the final text for coherency issues. After using this tool/service, the au- thor reviewed and edited the content as necessary and takes full responsibility for the content of the publication. Prague, May 4, 2026 Filip Tomasek Abstract The 2025 pledge of NATO members to allocate 5 percent of GDP on defence sparks debate about the composition of such expenditures. As defence R&D is already part of the defence budgets, this thesis examines...