Public sectors are under increasing pressure to provide better services and improve their efficiency in order to boost economic growth and social welfare. The promotion of R&D and innovation has proved to be a key determinant of economic performance of countries. However, little is known about the effect of publicly funded R&D activities on the performance and efficiency of public sectors. A better understanding behind such relationship is crucial, particularly in present times of public budget constraints. Accordingly, the article measures the public sector performance and efficiency of European countries by the construction of composite indicators. Moreover, it explores and tests the role of publicly funded R&D on public sector performance (using multivariate techniques and econometric analyses) and efficiency (by means of a non‐ parametric approach). Results indicate that publicly funded R&D should be considered a dimension of public sector performance, particularly when complementarities between private and public R&D emerge, but that it also plays a role on its efficiency.