Innovation on (government) demand?

Next week we will organize the 7th ZEW/MaCCI Conference on the Economics of Innovation and Patenting in Mannheim and the program will be great. We will have Bronwyn Hall from Berkeley and Pierre Azoulay from MIT as keynote speakers. I’m definitely looking forward to hear them speak.

Myself, I will present a new project on the relationship between public procurement and innovation. In brief the research question is the following. The European Union wants to make more use of public procurement to increase demand for innovative services and products offered by firms. This makes a lot of sense because procurement volumes—the number of goods that the government buys—is extremely large compared to what we usually spend on other R&D policies, such as for example subsidies.

In the past there was a problem that procurers,  in order not to impede fair competition, were not able to exactly specify what type of innovative product they want. Tenders had to be sufficiently general such that many firms would be able to bid for contracts. But that made it very hard for firms with innovative products to succeed in bidding rounds. Because public procurement contracts usually have to be given to the bidder with the best “value for money”. In most cases, however, innovative products are more expensive than existing alternatives, because you have to factor in the R&D costs to produce them. On the other hand they are superior in terms of performance but this higher “value” cannot be properly accounted for if innovation-related criteria are not allowed to be part of a procurement tender.

The EU recently launched a policy reform to address this problem and to allow for innovation-related components in procurement tenders. Germany did the same already in 2009. Therefore we study the effectiveness of the reform in Germany as it can possibly inform us about what we can expect at the European level. If you’re interested in the topic you can find further information on the poster below. The paper is still in the making but will hopefully appear soon.

Huenermund_INNOPAT_Poster

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