Public Procurement Can Speed up Innovation

In Germany, public procurement is a successful instrument for speeding up the introduction of innovative goods and services in companies. This is the result of a study carried out jointly by the Centre for European Economic Research (ZEW) in Mannheim, KU Leuven and Maastricht University. If tender calls in the public sector are explicitly targeted at the development of new technologies, this can bring about a general increase in the innovation activity of German businesses.

Providing the adequate framework for the public procurement of innovations was one of the goals of the Procurement Law Amendment Act of 2009. Thanks to the implementation of the act, Germany was able to secure its position as a forerunner in the field of public procurement in the European Union. Previous procurement regulations had made it difficult for government bodies to specify the innovation level of procured products or services as a selection criterion.

The goal of “Public Procurement of Innovation” (PPI), introduced as part of the legal amendment of 2009, is to promote the development of innovative goods and services whilst stimulating the demand for innovations in the German economy. In this context, PPI refers to public tenders which define the development of innovations as a binding selection criterion. The findings of the study shed light on the effectiveness of PPI as a policy instrument for promoting innovations.

On the basis of data from the Mannheim Innovation Panel (MIP) – a survey which has been conducted by ZEW on an annual basis since 1993 and comprises data on more than 20,000 firms – researchers analysed the share of turnover of 3,410 German firms generated from selling innovative products and services in 2012. Furthermore, the researchers estimated the impact of public tenders that explicitly cite the implementation of innovation among their selection criteria on the total turnover generated by a firm with new products and services.

Public tenders help to increase turnover of German firms

The results of the study have shown that PPI can in fact result in an increase in turnover for firms that were awarded such public procurement contracts. In 2012, PPI increased these companies’ turnover by a total of 13 billion euros, corresponding to 0.37 per cent of German GDP. This increase was thereby not driven by a rise in government expenditure since no significant increase took place around that time. At the same time, the researchers did not observe any comparable positive effects in firms with procurement contracts which do not specify innovation-related award criteria.

The findings of the study also indicate, however, that PPI had no significant effect on the share of market novelties. Instead, the positive impact of PPI is attributable to incremental, or gradual, innovations, which are not completely new to the market but the result of adaptations made to existing products. Making adaptations to products is not only associated with fewer risks but is also less prone to failure. In light of these results, the researchers stress the need for stronger incentives for public procurers and improved risk management in the public sector.

Risk aversion among public procurers still quite high

“Public procurers can be held accountable for failures in the procurement process. The benefits of the successful procurement of innovative products are, however, shared by all of society. The great individual risk faced by public procurers is thus disproportionate to the benefits reaped by a much broader group of stakeholders. As a result, there is a high risk aversion among public procurers,” explains ZEW Research Associate Professor Dirk Czarnitzki from KU Leuven.

In 2014, the EU passed revised public procurement directives, which are based on the German model. “Despite the fact that the implementation of the new EU procurement directives is currently only making slow progress, based on our observations in Germany, we expect a similarly positive growth effect in other Member States,” adds Dirk Czarnitzki.

Furthermore, the results of the study also hold for countries well beyond the borders of the EU. The researchers point out that many OECD countries are still facing regulatory obstacles when it comes to integrating the development of innovations into the public procurement process. The use of PPI as a strategic policy instrument has therefore been limited to only a small number of countries so far.

For further information please contact:

Prof. Dr. Dirk Czarnitzki, Phone +32 16 32 69 06, E-mail dirk.czarnitzki@kuleuven.be