Public Tenders Make Firms Less Innovative
Research
06.05.2024
The Competitiveness of Firms
The innovative capability of firms decreases if they win public tenders that include no incentives to innovate. By winning a public contract without additional award criteria, firms focus more on established products and services and lose innovative strength in terms of both their products and their processes. In the long term, this has the potential to jeopardise their competitiveness. These are the findings of researchers from ZEW Mannheim and KU Leuven based on data from the Mannheim Innovation Panel (MIP), the Tender Electronic Daily (TED) and the EPO Worldwide Patent Statistical Database (PATSTAT).
“Public tenders play an important role in the German innovation dynamic. Currently, many non-innovative tenders in the public sector contribute to a business environment that is harmful to innovation,” explains Bastian Krieger, head of the Junior Research Group “Co-Creation” in ZEW’s “Economics of Innovation and Industrial Dynamics” Unit. “By using criteria that go beyond mere price, public clients could reward innovation and incentivise firms to develop innovative solutions.”
Additional award criteria as an opportunity to promote innovation
If public tenders are mainly focused on price, firms lack the incentive to invest in innovative solutions. Rigid requirements can make it difficult for firms to realise innovative ideas or introduce new technologies, as they have to adapt to existing structures. If public procurement is aimed exclusively at established suppliers with familiar products or services, innovative firms are put at a disadvantage.
Public contracts with additional award criteria, on the other hand, can serve as a stepping stone for bringing innovative products and services to the market. Winning such a tender can open up access to new customers and markets. By working together with public sector clients, firms can build new partnerships, which in turn promote innovation. In addition, competing for public contracts can encourage firms to work more efficiently and make continuous innovative improvements.
About the methodology
The researchers distinguish between firms that have been awarded public contracts without additional award criteria (treatment group) and firms that have not (control group). They analyse the introduction of new or improved products and services over the past three years by firms that are part of the MIP. Furthermore, the study takes into account sales of established products and services, the share of sales of new or improved products and services, the introduction of new or improved processes to reduce costs and the resulting overall cost reduction.
