Public procurement as policy instrument for innovation

During the last decade, policy makers discussed the potential of public procurement as instrument in the area of technology policy. As a consequence, the European Commission has recently passed a new legislation that explicitly allows to contract R&D and innovation components within public procurement contracts. Germany had already implemented this new legislation from 2009 onwards. Consequently, we evaluate the potential of public procurement for innovation empirically. We estimate the average treatment effect on the treated (ATET) of innovation-directed public procurement on German firms' product innovation sales using the 2013 wave of Germany's contribution to the Community Innovation Survey (CIS). Interestingly, we find that firms with such procurement contract indeed sell more innovative products than other firms. However, these new product sales refer to incremental innovation, i.e. the products are mainly new for the respective firms' product portfolio, but those are not really market novelties. We do not find any positive effects on sales with market novelties. Thus we conclude that public procurement may be a powerful tool for accelerating the dissemination of new technologies rather than a trigger for original innovation. The results are confirmed in a number of robustness tests including a panel difference-in-difference estimation.