Does government funding complement or substitute private research funding to universities?

There is growing political pressure on universities to intensify their interaction with industry and to enlarge their own research funding options, in a context characterised by increasing constraints on public spending. However, whether the successful achievement of such a political desired outcome is consistent with a restriction of government funding is not clear and requires further investigation. As a matter of fact, there is scant empirical evidence on whether and to what extent government funding affects the external funding options available to universities, in particular those related to research and consulting activities. By using a set of probit and tobit panel data models estimated on financial data for the whole population of Italian university departments engaged in research in the Engineering and Physical Sci- ences, this paper provides evidence that government funding to universities complements funding from research contracts and consulting, contributing to increasing universities’ collaboration with industry and activating knowledge transfer processes.