Academic research has positive externalities, which justifies the public subsidies it gets. For one, it increases public knowledge. Then, good research makes also good teaching and thus better students. And with the example of Silicon Valley, one can see that research intensive academia can attract research-intensive industry. But is this just spatial reshuffling of activities that would have happened anyway?
René Belderbos, Bart Leten and Shinya Suzuki look at how multinational companies allocate their research and development foreign direct investment. And it appears to be strongly directed by local academic research. In other words, if you want to attract foreign R&D, you want to have goof academic research in place. And how do you get that? By subsidizing said academics.
I'm still not sure I know which way causality goes or whether there's one, unambiguous direction to begin with. Firms benefit from strong academics and academics benefit from private sector funding.
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