Understanding the macroeconomic effects of public research: An application of a regression-microfounded CGE-model to the case of the Fraunhofer-Gesellschaft in Germany

Estimating the economic returns to public science investments has been a key topic in economics. However, while in particular microeconomic approaches have been proposed, only a few studies have tried estimating the macroeconomic effects of public science investments. In this paper, we propose a micro-rooted macro-modelling framework, which combines the strength of an econometric causal identification of key effects with the power of a Computable General Equilibrium (CGE) framework, and provides additional economic structure of the estimates allowing us a fine-grained sectoral differentiation of all effects. Applying our approach to the German Fraunhofer-Gesellschaft, the world's largest publicly funded organization for applied research, we show that macroeconomic returns are - irrespective of econometric specification - a high multitude of the original investment costs. In specific, the activities by the Fraunhofer-Gesellschaft increase Germany´s GDP by 1.6% and employment by 437,000 jobs. Our CGE analysis further shows that the effects concentrate in the chemicals, pharmaceuticals, motor vehicles and machinery sectors. The substantial size of our estimated effects corroborate recent macroeconomic evidence on the social returns to innovation.