Channeling Knowledge Spillovers: Economic Impacts of NIH Funding on the Science R&D Industry

Abstract

Federal research funding from the US National Institutes of Health (NIH) is an important source of support for health and science innovation. In 2025, the NIH suddenly faced substantial budget cuts and funding changes, which has created significant concern among scientists and policymakers. Motivated by these contemporary events, this thesis examines how NIH funding impacts economic outcomes in the science R&D industry. First, I present a theoretical framework that examines how industry activity is affected by NIH funding through knowledge spillovers. Then, I conduct empirical analyses using a historical and plausibly exogenous shock from 1998-2003, when the NIH budget doubled from $13.7 billion to $27.2 billion. Through cross-sectional relationships, long difference estimates, and event studies, I find that this increase in NIH funding had an insignificant effect on payroll and employment, but a modest and positive effect on small establishments that builds over time, primarily in places with an initially high concentration of NIH-related activity. I conclude that NIH funding gradually impacts the formation of new businesses through knowledge spillovers, rather than immediate labor market effects, and has a stronger influence in places with a higher existing capacity for scientific research. Applying these findings to current events suggests that the reduction of funding may have limited immediate impacts on the science R&D industry, but might hurt entrepreneurship in the long run.