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65-83, 1994
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Robert Dalpd
c o m m u n i c a t i o n s , p h a r m a c e u t i c a l s , a n d scientific i n s t r u m e n t a t i o n .
Although there is no estimate of the size of public sector procurement in
the United States, the demand share seems to be smaller. 3 It is, however,
well known that the United States has one of the world's largest defense
sectors, which is an important buyer for several R&D intensive industries. 4
Even if the industries involved vary from one country to another, it
a p p e a r s t h a t g o v e r n m e n t s a r e t h e b u y e r s of 10% to 15% of t h e
production in industrialized countries. They are also important buyers
for several R&D intensive industries, not only for the military but also
for civil markets. In this respect, w h e t h e r or not governments develop
an explicit p r o c u r e m e n t policy t h a t is o r i e n t e d t o w a r d s innovation,
t h e i r de c i si ons c o n c e r n i n g prices, q u a n t i t i e s , a n d s t a n d a r d s affect
innovation, positively or negatively, in a group of industries involved in
g o v e r n m e n t procurement.
S e v e r a l s t r a t e g i e s h a v e b e e n d i s c u s s e d in an a t t e m p t to c o n v e r t
government procurement into instruments of innovation policy. One such
s t r a t e g y calls for public a d m i n i s t r a t i o n s to c o n t r i b u t e to i n d u s t r i a l
d e v e l o p m e n t by p r o m o t i n g innovation t h r o u g h t h e i r m a r k e t power. 5
Sustained by the long-standing a r g u m e n t concerning infant industries,
some s t r a t e g i e s r e g a r d public i n s t i t u t i o n s as able to n u r t u r e a n ew
e n t e r p r i s e by giving it its first order and allowing it to exploit other
public and private markets. 6 It is argued in a more recent theory t h a t by
g i v i n g n a t i o n a l i n d u s t r y p r i v i l e g e d a c c e s s to p u b l i c m a r k e t s ,
governments provide a chance to innovate and gain an advantage over
competitors. These strategies are justified by the large size of public
sector d e m a n d , the fact t h a t the public d e m a n d is relatively high in
R & D - i n t e n s i v e i n d u s t r i e s , w h i c h are d e f i n e d as s t r a t e g i c by m o s t
governments, and the role of the demand and the user, which is stressed
in innovation theory.
The role of g o v e r n m e n t p r o c u r e m e n t in i n n o v a t i o n was a n a l y z e d
m o s t l y t h r o u g h case s t u d i e s . In a few s t u d i e s , m e t h o d s h a v e b e e n
developed t h a t permit a larger profile to be obtained. 7 And, to date, only
a h a n d f u l of s y n t h e s e s have been a t t e m p t e d . 8 R e v i e w i n g t h e s e case
studies, I realized t h a t even if they were done by isolated researchers
w i t h v a r i o u s i n t e r e s t s , a n d t h i s s e e m s to e x p l a i n t h e l a c k of
c o m m u n i c a t i o n b e t w e e n t h e m , t h e i r r e s u l t s w e r e in fact r e l a t i v e l y
convergent. I also realized that the studies were performed mostly by
researchers concerned with the m a n a g e m e n t of innovation, who based
t h e m on a background of innovation theories. Policy dimensions, which
we think are essential to u n d e r s t a n d i n g government procurement, were
n e g l e c t e d . Policy d i m e n s i o n s a r e i m p o r t a n t for u n d e r s t a n d i n g , for
instance, the role of groups and institutions in procurement decisions.
My objectives are to review case studies of government procurement to
u n d e r s t a n d its role in i n n o v a t i o n , w h i l e e m p h a s i z i n g t h e policy
dimension. I will present the incentives and obstacles for new product
purchases on public markets.
Government Procurement and Industrial Innovation 67
N e w P r o d u c t D e m a n d on P u b l i c M a r k e t s
t e c h n o l o g i c a l d e v e l o p m e n t w h e n t h e y become th e first b u y e r of an
innovation or an improved product.
A buyer's role in the purchase of capital goods is obviously greater t h a n
in t h a t of consumer goods. 15 When products are aimed at individuals,
the latter have no means of making their needs known and demanding
products b e t t e r a t t u n e d to t he i r r e q u i r e m e n t s . In the case of capital
goods, clients h a v e specific r e q u i r e m e n t s , and can provide t e c h n i c a l
support for innovation. A customer's role can go as far as prototype
development, which is then passed on to another industry for production.
E. Von Hippe116 has shown, for instance, t h a t in the case of scientific
equipment, the vast majority of innovations are developed by the user.
A customer can also provide feedback on how production evolves in an
industry. The first buyer, therefore, plays a strategic role, assuming the
risks inherent to the first order and part of the costs of fine-tuning the
product. 17 Innovation in capital goods is made easier when industry has
ties with a client who also innovates and has a certain technological
capacity. 18
In the framework of government demand, it is convenient to examine,
in terms of the user's role in the innovation process and in terms of the
user's expressed needs, which of its characteristics explain the demand
for new products. The public sector shares certain characteristics with
p r i v a t e - s e c t o r b u y e r s , w h e r e a s o t h e r s a r e m o r e t y p i c a l of t h e
government sector.
Users with a g r e a t e r technological capacity are those t h a t can
c o n t r i b u t e t he most to a supplier's innovation. The first factor t h a t
d i s t i n g u i s h e s g o v e r n m e n t organizations t h a t buy n ew products from
those t h a t purchase standardized goods is their technological capacity. A
buyer t h a t is an innovator in its own right appears to be a necessary
c o n d i t i o n f a c i l i t a t i n g i n n o v a t i o n on t h e p a r t of t h e s u p p l i e r . This
p r e s u p p o s e s a positive r e l a t i o n s h i p b e t w e e n a u s e r ' s t e c h n o l o g i c a l
capacity and its d e m a n d for new high-performance products. K. Pavitt, 19
in a s t u d y c o v e r i n g b o t h t h e p r i v a t e a n d p u b l i c s e c t o r s , h a s
d e m o n s t r a t e d t h a t users' innovation activities have forced suppliers to
innovate in order to keep up with technological developments.
The question at this stage is w he t h er a client will be satisfied with a
standardized product, or take the risks inherent to the purchase of a new
product, even if it is only at the prototype stage or earlier. A client's
tendency to purchase new products, and chances of success, depend to a
great extent on t h a t client's technical expertise. Furthermore, mastering
b a s i c t e c h n o l o g y is i m p e r a t i v e for t h e o p e r a t i o n of c o m p l e x a n d
sophisticated equipment. A government's research effort is also strategic
because it improves the possibility of transferring technology to industry.
Suppliers, therefore, have an advantage in dealing with public clients
h a v i n g a high degree of technological capacity, particularly when the
development of a new generation of technology is at stake. Technology
t r a n s f e r based on a user's in-house research and development (R&D)
Government Procurement and Industrial Innovation 69
better chance of finding other markets for its product in similar services
in the private or the public sectors, and, if the requirements correspond
with their actual needs, users will be in a better position to evaluate the
various products and to choose the most adequate technologies.
As is t h e case w i t h a u s e r ' s t e c h n o l o g i c a l capability, t h e r e l a t i o n
b e t w e e n n e e d s a n d r e q u i r e m e n t s u n d e r l i e s a u s e r ' s c e n t r a l role in
i n n o v a t i o n . S t a n d a r d s m u s t be d e f i n e d by t h e u s e r a n d n o t by a
centralized administration not directly involved in their implementation,
especially if it does not possess the relevant information. Our analysis
therefore has direct implications for innovation policies. First, users in
t h e p u b l i c s e c t o r s h o u l d c o m m u n i c a t e t h e i r n e e d s in t e r m s of
p e r f o r m a n c e r a t h e r t h a n t h r o u g h s t a n d a r d s or t r a d e m a r k s . And, in
order to stimulate innovation, requirements should be set by users and
not by a c e n t r a l a g e n c y t h a t is not closely r e l a t e d to u s e r s ' needs.
However, a tendency by end users to buy products t h a t are too complex
and too costly would require intervention by a central agency. 26
Government procurement is most effective when it corresponds to the
c o m m e r c i a l m a r k e t s t r a t e g i e s of the suppliers. This factor was also
stressed by R. Hebert and R. Hoar. 27 According to researchers who have
studied government intervention in technological development through
purchases, their potential to stimulate innovation stems from the way
this me a sure directly affects the industry's market. 28 Through decisions
t h e y m a k e as clients, g o v e r n m e n t s have a direct impact on i n d u s t r y
m a r k e t size and, eventually, on profits. When government buyers ask for
h i g h - p e r f o r m a n c e p r o d u c t s , a s u p p l i e r c a p a b l e of m e e t i n g t h e s e
r e q u i r e m e n t s moves into a position of increased m a r k e t share. Public
sector procurement policies can also positively affect suppliers' strategies
if it reduces risk.
In this respect, industry cannot be responsive to procurement policies
if other factors hinder innovation. 29 For instance, in the procurement of
new complex goods, suppliers will participate only if they assume that
the level of risk is not too high and if they can obtain future contracts.
A public m a r k e t of a certain size is a necessary incentive for industry.
A m a r k e t c o n s t i t u t e s an i n c e n t i v e for i n n o v a t i o n if o r d e r s r e a c h a
m i n i m u m value and allow a company to offset research costs and reduce
risks. In this situation, a company will find it worthwhile to satisfy the
user's requirements by developing a new product. Innovation risks are
reduced if the firm is g u a r a n t e e d an initial m a r k e t and if its innovation
can s e c u r e an a d v a n t a g e in follow-up c o n t r a c t s . In th e case of th e
d e v e l o p m e n t of a n e w g e n e r a t i o n of technology, sellers will consider
participating in initial orders even if the contract value is low, with the
h o p e of g e t t i n g in on t h e g r o u n d floor a n d h o l d i n g a n o p t i o n on
subsequent purchases. The m i n i m u m value varies according to the firm
and the industry.
Case studies have underscored the importance of the concentration of
orders in g u a r a n t e e i n g suppliers a sufficient market. 30 The increased
Government Procurement and Industrial Innovation 71
s o m e d e g r e e of t e c h n i c a l e x p e r t i s e , r a t h e r t h a n act as a s i m p l e
acquisitions bureau for several small and isolated government clients.
Concentration facilitates innovation when it allows competent users to
have direct contact with suppliers. Also, demand-side concentration has
forced fusions among suppliers who develop market power comparable to
that of the buyer, thus reinforcing their position in the market through
political leverage. As a result, they become less inclined to innovate.
The fact t h a t considerations other t h a n technology and quality of
products are often involved in procurement decision reduces the impact
of p r o c u r e m e n t policies for innovation. P r o c u r e m e n t decisions in the
public sector result from a variety of economic as well as political and
institutional factors. For instance, it is well known t h a t the regional
d i s t r i b u t i o n of orders has an electoral impact. The most i m p o r t a n t
n o n e c o n o m i c factors in p r o c u r e m e n t decision m a k i n g are n a t i o n a l
security and electoral support. These objectives, particularly national
security, occasionally relegate cost considerations to a secondary role in
decisions c o n c e r n i n g g o v e r n m e n t p r o c u r e m e n t of h i g h - p e r f o r m a n c e
products. In such instances, performance-oriented procurement tends to
favor innovation.
The defense i n d u s t r y is a typical example of this dynamic. In the
interest of national security, product performance rather than price is
the primary selection criterion. Governments are prepared to pay more
in r e t u r n for sophisticated and reliable high-precision armaments. In
this scenario, innovation and product improvement constitute a
condition for market entry. For some purchases, price varies according to
product performance. For example, in the case of INTELSAT satellites,
price conditions linked to performance indicators such as initial failure
and design life can fluctuate between 17% and 43% of the contract. 40
This dynamic also comes into play, although to a lesser extent, in other
sectors such as health, in which product performance is also essential.
Managers of government-controlled utilities tend to focus on quality and
p r o d u c t p e r f o r m a n c e in o r d e r to s a t i s f y s o c i o e c o n o m i c goals.
M e g a p r o j e c t s o f t e n give rise to t h e d e v e l o p m e n t of n e w p r o d u c t
g e n e r a t i o n s . 41 The d e v e l o p m e n t s in n u c l e a r t e c h n o l o g y in several
industrialized countries during the 1970s in response to energy demand
serve as an illustration of this type of dynamic.
Governments are major users of new products when technology is the
primary criterion for purchases. However, given the political nature of
s t a t e i n t e r v e n t i o n , o t h e r c o n s i d e r a t i o n s can t a k e p r i o r i t y over
technology. The objectives of various government agents are not always
best s e r v e d by the p r o c u r e m e n t of new products. P r o c u r e m e n t has
important implications on both political and industrial levels.
At the industrial level, several studies have demonstrated the impact
of g o v e r n m e n t purchases on some aspects of the industrial structure:
international trade, 42 multinationals, 43 concentration, 44 and regional
distribution of economic activity. 45 For example, defense spending can
Government Procurement and Industrial Innovation 73
In g o v e r n m e n t p r o c u r e m e n t s i t uatio n s , a close r e l a t i o n b e t w e e n a
public purchaser and a firm tends to develop, and, when the firm becomes
the sole supplier, it has little incentive to innovate. In order to get as
m a n y social benefits as possible, a firm that has developed a product for a
public sector buyer m u s t m a i n t a i n its research activities and find new
a p p l i c a t i o n s for its p r o d u c t s . A c o m p a n y m u s t t h e r e f o r e seek n e w
g o v e r n m e n t c l i e n t s or f i n d b u y e r s in t h e p r i v a t e m a r k e t . C l i e n t
specialization, rather than product specialization, limits transfer
possibilities. F i r m s dealing with a limited n u m b e r of clients in public
m a r k e t s t e n d to neglect n e w applications for t h e i r products in other
markets. In industries serving both public and private sectors, some firms
tend to specialize in only one market. 53 This specialization occurs when
the two markets have different dynamics and criteria for competition.
Government buyers tend to maintain the same suppliers, which results
in the establishment of a close relationship between client and supplier.
One explanation for this practice is the conformity of technical systems.
According to R. Williams and R. Smellie, 54 the initial supplier holds a
s t r o n g option on s u b s e q u e n t orders an d on m a i n t e n a n c e a n d p a r t s
contracts. It is in the client's best interest to maintain its supply source
through regular ordering with the same supplier. This factor is especially
relevant w h e n the technical systems do not allow for substitution from
other suppliers. Also, since the selection of a new supplier presents a risk,
there is a tendency to favor a supplier who has given satisfactory service
and with whom the client is familiar. As for the supplier, specialization
gives it certain advantages, such as the political leverage to force a client
to do business with it because the selection of a n o t h e r supplier could
result in a factory closing and a drop in regional employment. 55
France's public sector m a r k e t is an illustration of firm specialization. 56
J. Zysman 57 has shown that in the electronics industry, enterprises have
to c h o o s e b e t w e e n p u b l i c or p r i v a t e m a r k e t s . T h i s choice can be
e x p l a i n e d by t h e di f f e r e nt d y n a m i c s b e t w e e n th e two m a r k e t s : The
competition in private m a r ke t s focuses primarily on quality and price,
whereas in the public markets, political leverage is an additional factor.
When specialization comes into play, it can have three impacts. First,
suppliers often have little incentive to innovate given their guaranteed
m a r k e t access. Second, in a bilateral monopoly, both the client and the
supplier have a tendency to h a n g on to the same technology in order to
avoid innovation risks and adjustment costs. Third, when suppliers are
limited to a single client, innovation cannot be fully exploited, given the
fact t h a t transfers to other applications are fairly difficult to achieve.
In m o s t i n d u s t r i a l i z e d c o u n t r i e s , a l m o s t h a l f of th e p r o c u r e m e n t
b u d g e t is a w a r d e d on a sole-source basis. This is e x p l a i n e d by two
factors: It could be economically inefficient to m a i n t a i n two or more
suppliers, as is the case w h e n complex goods for defense systems are
involved, and, considering m a i n t e n a n c e and parts, the initial supplier
f r e q u e n t l y h a s a n a d v a n t a g e d u e to t e c h n i c a l s t a n d a r d s . T h e
76 R. Dalpd
i m p l i c a t i o n s o f t h i s p o l i c y on c o n t r a c t p r i c e h a v e b e e n s t u d i e d in
A m e r i c a n economic l i t e r a t u r e . T h e a s s u m p t i o n is t h a t firms, w h e n t h e y
do n o t h a v e c o m p e t i t o r s , h a v e no incentives to limit costs a n d increase
t h e i r p r o d u c t i v i t y . T h e c o n c l u s i o n is t h a t m e c h a n i s m s s h o u l d be
i m p l e m e n t e d in o r d e r to i n h i b i t t h e i r inefficient behaviors.
If, as we h a v e p r e v i o u s l y c l a i m e d , t h e v a l u e of c o n t r a c t s a n d t h e i r
c o n c e n t r a t i o n can c o n s t i t u t e an i n c e n t i v e for s u p p l i e r s to i n n o v a t e , this
s h o u l d n o t be e x t e n d e d to t h e e s t a b l i s h m e n t of b i l a t e r a l m o n o p o l i e s .
S e v e r a l cases of i n n o v a t i o n in public m a r k e t s h a v e d e m o n s t r a t e d t h a t
b o t h clients a n d s u p p l i e r s h a v e h a d o t h e r sources or outlets. 58 E v e n if
one s u p p l i e r can fill a m a j o r s h a r e of orders, access to o t h e r s u p p l i e r s is
s t r a t e g i c b e c a u s e it c a n c o n t r i b u t e to t h e t e c h n o l o g i c a l c a p a c i t y of t h e
user. O n e c a n t h e n s u p p o s e t h a t clients h a v e t h e a d v a n t a g e of b e i n g in a
position to a c q u i r e p r o d u c t s from a c o m p e t i t o r of t h e m a i n s u p p l i e r w h e n
p e r f o r m a n c e is a factor. W i t h this experience, t h e u s e r could p a s s on to
its main supplier knowledge of h i g h e r - p e r f o r m i n g products
m a n u f a c t u r e d by its competitors.
The lack of coordination among government policies makes
p r o c u r e m e n t d i f f i c u l t to u s e s i m u l t a n e o u s l y w i t h o t h e r i n s t r u m e n t s .
G o v e r n m e n t s c a n u s e a w i d e r a n g e o f i n c e n t i v e s in a d d i t i o n to
p r o c u r e m e n t . All i n n o v a t i o n policy and, m o r e broadly, i n d u s t r i a l policy
m e a s u r e s , can a s s i s t a c o m p a n y d u r i n g t h e i n n o v a t i o n process, as well as
in t h e p r o d u c t i o n a n d m a r k e t i n g p h a s e s . T h r o u g h p r o c u r e m e n t ,
governments can guarantee the innovating firm a market,
i m p l e m e n t a t i o n of s u b s i d i e s , a n d f i n a n c i n g p r o g r a m s , p o t e n t i a l l y
r e d u c i n g t h e risks associated w i t h innovation.
Public aid c a n be e i t h e r financial or technical. F i n a n c i a l incentives, be
t h e y s u b s i d i e s or fiscal e x e m p t i o n s , r e d u c e i n n o v a t i o n costs a n d risks,
a n d t h e i r i m p a c t c a n be m a x i m i z e d by p r o v i d i n g a firm an o p p o r t u n i t y to
u n d e r t a k e r e s e a r c h p r o g r a m s t h a t it w o u l d n o t h a v e o t h e r w i s e b e e n able
to h a n d l e . In i n d u s t r i a l i z e d c o u n t r i e s , s o m e of t h e i n d u s t r i e s active in
public m a r k e t s are in fact a m o n g t h e m o s t h i g h l y subsidized. T h e y are
often l i n k e d to t h e d e f e n s e i n d u s t r y , a n d t h e y c a n n o t u n d e r t a k e m a j o r
r e s e a r c h p r o g r a m s w i t h o u t g o v e r n m e n t f i n a n c i n g . 59 In C a n a d a , m a j o r
s u b s i d i z e d i n d u s t r i e s for R&D are a e r o s p a c e a n d t e l e c o m m u n i c a t i o n s ,
two industries for which governments are first users of many
i n n o v a t i o n s . 60 According to a s t u d y of 65 C a n a d i a n s t a r t - u p c o m p a n i e s
in m i c r o e l e c t r o n i c s a n d c o m m u n i c a t i o n s , f i r m s selling p r o d u c t s to t h e
public sector are m o r e heavily subsidized t h a n t h o s e doing b u s i n e s s only
w i t h t h e p r i v a t e sector. 61
Government intervention also involves technical support. Public
l a b o r a t o r i e s a n d e n t e r p r i s e s do a s i g n i f i c a n t a m o u n t of R&D in t h e i r
f i e l d s of p r o c u r e m e n t . G o v e r n m e n t r e s e a r c h is d o n e m o s t l y in t h e
d e f e n s e sector, w h e r e a s public e n t e r p r i s e s are p a r t i c u l a r l y active in R&D
r e l a t e d to t r a n s p o r t a t i o n , e n e r g y , a n d t e l e c o m m u n i c a t i o n . D a t a on
C a n a d i a n p a t e n t s reveal g o v e r n m e n t o w n e r s h i p of a sizable n u m b e r of
Government Procurement and Industrial Innovation 77
Conclusion
Notes
1. EEC, The ~Cost of Non-Europe ~ in Public.Sector Procurement (Atkins Report) (Bruxelles, 1988).
2. R. Dalp6, C. DeBresson, a n d H. Xiaoping, "The Public Sector as F i r s t U s e r of Innovations,"
Research Policy, Vol. 21, no. 3 (1992), pp. 251-263; R. Dalp6 and C. DeBresson, "Le secteur
public comme premier utilisateur d'innovations," L'Actualitd dconomique, Vol. 65, no. 1 (1988),
pp. 53-70.
3. S .,~ MacManus, Doing Business with Government (New York: Paragon House, 1992).
4. R. R. Nelson (ed.), Government and Technical Progress - - A Cross-Industry Analysis (New York:
Pergamon Press, 1982).
5. R. Hebert and R. Hoar, Government and Innovation: Experimenting with Change (Washington:
National B u r e a u of Standards, 1982); R. Rothwell and W. Zegveld, Industrial Innovation and
Public Policy (London: F r a n c e s Pinter, 1980); A u s t r a l i a n Science a n d Technology Council,
Government Purchasing and Offset Policies in Industrial Innovation (Canberra, 1984); J. N. H.
B r i t t o n a n d J. M. Gilmour, The Weakest Link: A Technological Perspective on Canadian
Industrial Underdevelopment (Ottawa: Science Council of Canada, 1978); Science Council of
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Government Procurement and Industrial Innovation 83
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