Innovation Policy Lecture 8: Demand-Side Instruments and Public Procurement
Overview of Innovation Policy and Demand-Side Instruments
Context within Innovation Policy:
The lecture is part of a broader curriculum covering:
Introduction to Innovation and Innovation Policy.
Legitimation: Market failures, system failures, and the market for knowledge.
Limits of economic analyses and alternative approaches.
Regulation (Lecture 7).
Demand-Side Instruments: Public Procurement (Lecture 8).
Supply-Side Instruments: R&D financing, technology transfer, networks/clusters, entrepreneurship, and education.
Demand-Side Innovation Policy: Background and Logic
Shift from Supply-Side: Traditional supply-side policies (e.g., direct R&D funding) have often failed to bring innovation performance and productivity to desired levels.
Addressing Failures: Targeted demand-side policies address market and system failures where social needs are pressing.
Economic Strategy:
"Getting prices right" to foster markets for innovation.
Increasing awareness of the feedback linkages between supply and demand.
Fiscal efficiency: In the face of budget cuts, demand-side policies boost innovation while increasing the productivity of public spending.
Matching Forces: Effective innovation policy requires matching supply-push forces with demand-pull forces to articulate demand and transform private and public markets.
Articulating Demand Process:
Identifying users with common needs.
Turning those needs into a common demand.
Linking that demand to a pool of innovators.
Key Definitions in Innovation Procurement
Innovation Procurement: A practice or process defined by the degree of technological change created.
PPI (Public Procurement of Innovation): Purchasing innovative solutions that are near-to-market or newly introduced.
GPP (Green Public Procurement): Purchasing goods/services with reduced environmental impact across their life cycles.
Circular Procurement: Focused on closed-loop cycles.
PCP (Pre-Commercial Procurement): Procurement of R&D services for solutions not yet available on the market.
Innovation Partnerships: A specific legal procedure to foster long-term cooperation between a company and a public authority.
Classification by End-User:
Direct Procurement: Public agency is the end-user.
Cooperative Procurement: Multiple public entities bundle their demand.
Catalytic Procurement: The state procures to stimulate a market for private users.
Tender Mechanics: Defined by Technical Specifications (functional vs. detailed) and Award Criteria (price vs. quality/innovation).
Economic Arguments for Government Demand-Side Support
High Entry Costs: Lead users often endorse the bulk of learning and development costs for manufacturers.
Lack of Network Effects: Difficulty in achieving the critical mass necessary for new technology adoption.
Transaction and Conversion Costs: High costs for users to learn new systems or create linkages to existing products.
Lock-in Effects: Potential for path dependencies where users are stuck with existing infrastructure, resisting disruptive changes.
Lack of Interaction: Insufficient involvement of users in the innovation process due to a lack of communication channels between carriers and manufacturers.
Information Asymmetry: Users may lack information or cognition regarding the benefits, safety, and reliability of innovations.
Skill Gaps: A lack of application skills for using new innovations among either consumers or the state.
Classification of Demand-Side Instruments
Systemic Policies/Approaches: Lead market initiatives, cluster policies, and technology platforms.
Regulation: Use of standards to set innovation targets, product information requirements, and ensuring legal security for new product usage.
Public Demand/Procurement: R&D procurement, general procurement in targeted areas, and the state acting as a lead user.
Support of Private Demand: Demand subsidies, tax incentives, articulation of private demand, and awareness/training.
Enable/Marketing: Adjustment of training programs, eco-labeling, and marketing support.
Articulation: Organizing discourse to signal societal expectations and preferences to the market.
The Innovation Leverage of Public Demand
Scope and Size:
Over public authorities in the EU.
Annual spending accounts for roughly of GDP, totaling approximately per year on services, works, and supplies.
State as Lead User:
Bearing high entry costs and providing functionality signals (demonstration effects) to private consumers.
Fostering acceptance of innovations tied to sectoral policy goals (e.g., sustainability).
Triggering spill-overs and network effects for complementary innovations.
Direct Effects on Suppliers:
Market security and clear expectations for return on investment.
Creation of critical mass and bringing R&D closer to the market.
Interactive specification: Common learning and risk reduction through discourse.
Agency Types in Innovation Procurement (Rainville, 2016)
Cluster 1 () - User-focused Direct Procurers: Characterized by direct and cooperative procurement, infrequent tendering, and small/municipal scales. Common in Germany and Poland.
Cluster 2 () - Collaborative Innovative Procurers: Large national entities driven by policy, using PPI and various information sources. Common in Spain and the UK.
Cluster 3 () - Supplier-focused Pre-Commercial Procurers: Regional entities using PCP and catalytic procurement, often outsourcing services and consulting suppliers. Common in Italy.
Conceptual Framework for Innovation-Oriented Procurement
Innovation Dimensions:
Innovation Diffusion: Focus on buying state-of-the-art goods and avoiding obsolete solutions.
Degree and Type: Assessing how innovative a product is and whether it provides additional welfare effects.
Measures Dimensions:
Openness: Allowing suppliers to offer new solutions via flexible award criteria.
Knowledge-related: Professionalizing procurement organizations and using detailed descriptions or market observation.
Award Criteria Impacts:
Price as Sole Criterion: Leads to pure price competition, a "race to the bottom," and neglect of environmental/social aspects. It often leads to higher long-term costs due to lower quality or stuck solutions.
Openness Instruments: Using Most Economically Advantageous Tender (MEAT), performance-based indicators, and life-cycle cost assessment.
Functional Specifications: Describing what should be achieved rather than how, allowing for variants and alternative solutions.
Pre-Commercial Procurement (PCP) vs. Innovation Procurement
Distinction:
Innovation Procurement: Procuring existing or newly introduced innovative products available on the market.
PCP: Procuring products/services yet to be developed or not ready for series production.
PCP Phases:
Phase 0: Preparation, drafting tender specifications, and market consultation.
Phase 1: Solution design and feasibility.
Phase 2: Prototyping.
Phase 3: Original development and testing of a limited set of first products.
Phase 4: Deployment and large-scale commercial procurement of end-solutions.
Status in EU: PCP is currently an underutilized opportunity compared to other regions; the EU RTD expenditure as a percentage of GDP remains lower than targets.
Policy Initiatives to Promote Innovation-Oriented Procurement
European Union:
Strong emphasis on public procurement and PCP for ICT promotion.
Directive 2014/24/EU: Negotiated procedures with prior calls for competition are now standard. Introduced "Innovation Partnerships" to link R&D contracts directly with the purchase of commercialized outcomes.
Germany:
Established the Competence Centre for Innovative Procurement (KOINNO) to advise procurers at all levels.
Pilot projects for PCP procedures and the "Leadership Through Innovation" prize.
Recommendations: Coordinate fragmented procurement, improve statistical data, and establish programs similar to the U.S. SBIR.
France (Nagle, 2019):
A policy shift requiring agencies to favor Open Source Software (OSS) over proprietary software to reduce costs.
Resulted in an increase of nearly OSS contributions per year.
Estimated social value creation of annually to replicate these contributions.
Increased IT startups and jobs, though it observed a yearly decrease in software-related patents.
U.S. Small Business Innovation Research (SBIR) Program:
Federal agencies allocate parts of R&D budgets to SMEs via competition.
Phases include feasibility studies and implementing project proposals (prototypes).
Public Procurement and Standards
Role of Standards: Standards create demand, facilitate market entry, and aid diffusion in cases of market failure.
Public purchasers use standards as performance or functional requirements to ensure quality and lower costs.
Company Success (Blind et al., 2019):
Companies successful in product innovation AND engaged in standardization have significantly higher chances of winning public tenders.
Standardization provides a competitive advantage and access to crucial knowledge and contacts with procurers.
Green Public Procurement (GPP) and Standards:
Krieger & Zipperer (2022) found that winning GPP awards increases the probability of introducing eco-friendly products by , particularly for SMEs (under employees).
GPP success relies on environmental criteria like eco-labels, energy efficiency standards (ISO 14001), and environmental management certifications.
GPP Complexity: "Off-the-shelf" products rely on labels; radical innovations require innovation partnerships where standardization must be integrated into every step of the PCP process.