Opening up Military Innovation

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.

We document that the U.S. defense industrial base has become less innovative and more concentrated in recent decades, and the Open program seeks to address these kind of challenges . We show that the Open program attracts new entrants (e.g. 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 (an indicator of successful technology development), and patenting.

Conventional awards have no effects on these outcomes but do increase the chances of future defense SBIR contracts, fostering incumbency. We find that Open's success is partly due to attracting firms with larger treatment effects (e.g. new entrants) and partly to the bottom up nature of the program itself (exploiting machine-learning text analysis of SBIR application).

Our 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.