Research conducted by university researchers for industry constitutes one of the main channels through which knowledge and technology are transferred from science to the private sector. Since the value of such inputs for the innovation performance of firms has been found to be considerable, it is not surprising that firms increasingly seek direct access to university knowledge. In particular, industry funding for university research has been increasing in most OECD countries.

This development, however, spurred concerns regarding possible long-run effects on scientific output. While some policy makers argue that the potential of universities to foster and accelerate industrial innovations is not yet fully exploited, others are concerned with the distraction of academics from their actual research mission.

Our results show for a sample of professors in science and engineering in Germany that a higher budget share from industry reduces publication output of professors both in terms of quantity and quality in subsequent years. This finding supports the “skewing problem” hypothesis for science and engineering faculty in Germany. If information sharing among scientists via publications is the basis for cumulative knowledge production and thus for scientific progress, industry funding that reduces publications may have detrimental effects on the development of science. On the other hand, we find that industry funding has a positive impact on the quality of applied research if measured by patent citations. Industry funding may thus have beneficial effects by improving impact and quality of more applied research. If industry funded research results in successfully patentable and industrially relevant technologies it may create economic as well as social value.