We have a new paper “Public Procurement of Innovation: Evidence from a German Legislative Reform“ out at IJIO (preprint available without paywall here under “Research”) and I’ve briefly summarized the content in a Twitter thread (apparently that’s were these things happen these days, blogs are so 2012…). For reference, I’ll link to the tweets below:
Our paper "Public Procurement of Innovation: Evidence from a German Legislative Reform" is now online at IJIO (pre-print available on my website). And I think there could be some interesting lessons for post-Covid innovation policy in there. 1/ https://t.co/OzmGxWk3NR
— Paul Hünermund (@PHuenermund) May 17, 2020
2/ Most innovation policies we have (R&D subsidies, tax credits, patents, etc.) are operating on the supply side. But in recent years, there's a growing interest by academics and policy-makers in demand-side policies, such as public procurement of innovation.
— Paul Hünermund (@PHuenermund) May 17, 2020
3/ Now, the empirical evidence we have on this is surprisingly little (especially in relation to the number of conceptual papers). And most of the seminal work is on military procurement and DARPA-style basic research. See a recent paper by @johnvanreenen: https://t.co/1gMuCNqhOz
— Paul Hünermund (@PHuenermund) May 17, 2020
4/ There was also a problem with public procurement of innovation for civilian purposes in the past: framework conditions were simply not up to the task. Most PP regulations were focussed on providing transparency and counteracting corruption by public officials.
— Paul Hünermund (@PHuenermund) May 17, 2020
5/ That's why calls for tenders usually required very narrow product descriptions (defined by the public procurers) and award criteria were almost exclusively based on lowest price at purchase. That's not a great environment for coming up with innovative products!
— Paul Hünermund (@PHuenermund) May 17, 2020
6/ The German government adressed this problem in a policy reform in 2009. Since then innovation-related components can be explicitly part of the call for tenders, and purchase-price now has lower weight in the award procedure. Compare the old and new version of calls: pic.twitter.com/dKtQ4IOhXb
— Paul Hünermund (@PHuenermund) May 17, 2020
7/ Similar laws have been passed EU-wide in directives 2014/24/EU and 2014/25/EU, although they're still not implemented in all member states. We look at the immediate post-reform period (2010–2012) in Germany and see what effects the law change had.
— Paul Hünermund (@PHuenermund) May 17, 2020
8/ We find remarkably similar estimates across a wide set of specifications (OLS, matching, Poisson fixed effects, we also apply a new IV estimator proposed by @lewbel, which exploits heteroskedasticity in the first-stage, without the need for outside instruments). pic.twitter.com/H1KyXbjKEE
— Paul Hünermund (@PHuenermund) May 17, 2020
9/ So even though we don't have a perfect experiment here, the stability of results across a variety of estimators is reassuring. Our (admittedly favorable) interpretation is that because the policy instrument is still new, there was little time for public procurers
— Paul Hünermund (@PHuenermund) May 17, 2020
10/ to accumulate substantive domain knowledge, so that selection into treatment was mainly based on observable firm characteristics. Our results indicate that PP works – quite well in fact. Firms that win respective contracts show significantly higher sales with new products.
— Paul Hünermund (@PHuenermund) May 17, 2020
11/ But, as you can see in the effect plots above, the effect seems to be mainly driven by incremental innovations that aren't market novelties. This is likely due to a lack of technological and market knowledge on the side of procurers, as well as
— Paul Hünermund (@PHuenermund) May 17, 2020
12/ insufficient risk-management abilities of public authorities, which currently still limites the potential impact of public procurement as an innovation policy instrument (so don't expect the next internet coming from this, at least not in the short-run).
— Paul Hünermund (@PHuenermund) May 17, 2020
13/ Nonetheless, even if public procurement contracts only result in incremental innovations, which are only new-to-the-firm, this could still be quite interesting from a technology diffusion point of view.
— Paul Hünermund (@PHuenermund) May 17, 2020
14/ Especially in times when private demand is low, due to the Covid crisis, the government could play an important role to keep the innovation eco system alive by using public procurement of innovation as a strategic policy instrument.
— Paul Hünermund (@PHuenermund) May 17, 2020
15/ Public procurement budgets are large (OECD avrg: 12% of GDP) and if some of that money could be channeled towards more innovative solutions, this could not only provide important incentives for R&D but, also lead to better public good provision. There might be a win-win here!
— Paul Hünermund (@PHuenermund) May 17, 2020
Paul Hünermund, Ph.D. 