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Research Universities Create Economic Spillover, Study Shows

March 6, 2014

A $1 increase in university spending generates an 89 cent increase in local noneducation labor income — evidence of a measurable spillover effect created by public research institutions, according to recently published research out of the University of California, Merced.

While past studies have looked at how research universities spur innovation and patents, little has been known about how the institutions contribute to regional economic development more broadly. UC Merced Professor Alexander Whalley and Rensselaer Polytechnic Institute Professor Shawn Kantor sought to answer that lingering question by studying massive datasets that tracked university spending and county economic changes from 1981 to 1996.

“There’s this idea that universities are special and that they should have really large effects on a region’s economy. People are always talking about Stanford’s role in creating Silicon Valley, but there are many, many other reasons why Silicon Valley has been so successful,” Whalley said. “We wanted to tease out the effect that research universities alone have on regional development — a true apples-to-apples comparison.”

In terms of public policy, Whalley said the study’s findings show a university can be a tool to help develop a region’s economy. Even taxpayers who aren’t connected to a university stand to benefit from its presence, he said.

“Being at a brand new university, created with a substantial public investment, got me interested in knowing what the broader economic benefits really are,” Whalley said.

Research universities exist to create and share knowledge, and are heavily supported in this mission. In the 2008 fiscal year, public universities received $85 billion from state and local governments for teaching, research, outreach and other efforts, according to a report by the State Higher Education Executive Officers.

The paper “Knowledge Spillovers from Research Universities: Evidence from Endowment Value Shocks” has been published in The Review of Economics and Statistics, a 97-year-old general journal of applied economics. The journal, edited at the Harvard Kennedy School and published by MIT Press, has published some of the most important articles in empirical economics.

Universities obviously have a direct impact on their regions — they attract students and employ workers themselves, automatically growing the economy like any other large business. However, economists like Whalley want to know what kind of additional benefits universities create — the spillover effects of the new knowledge and discoveries.

For their analysis, Whalley and Kantor studied 135 leading research colleges and universities in 85 counties in the United States. They zeroed in on university expenditures, university endowment market values and local labor income in the noneducation sector.

Many universities have large endowments that are invested in the stock market. The universities are legally bound to spend a certain percentage of their endowments every year, and the spending is tracked and measured. In boom years, the endowments grow and university spending increases; in lean years, the endowments shrink and universities cut back. A key benefit for the researchers is that the endowments aren’t impacted by the local economy, making them a useful tool for measuring the effects of university spending.

Whalley and Kantor studied how the changes in university spending affected local economies and whether the dollars created spillovers. Beyond finding that increased spending benefits noneducation sectors, the researchers report finding the effects last for at least five years, suggesting university spending creates more than a simple multiplier effect, the researchers wrote.

They also found evidence that the spillovers are larger when local universities are focused on research and when research universities are technologically closer to local firms, allowing industry to share a labor market with higher education and cite university patents.