Public procurement as a tool for innovation policy

Governments are among the largest buyers in many sectors, from healthcare to defense, and they can use their purchasing power to encourage companies to develop new and improved technologies. This approach, known as Public Procurement of Innovation (PPI), has gained attention as an alternative to traditional R&D subsidies. While some countries, particularly the U.S., have long used procurement to drive innovation (think of GPS and the internet), the effectiveness of PPI in general remains unclear.

With the European Union and other economies looking to PPI as part of their industrial policy strategies—especially in tackling challenges like climate change, technological competition and defense autonomy—understanding what works and what doesn’t is more important than ever.

What the study aimed to find out

This research set out to answer four critical questions:

1. Does PPI actually drive innovation?
2. How should procurement be designed to maximize innovation?
3. What barriers prevent effective PPI implementation?
4. How does PPI fit within the broader mix of innovation policies?

By reviewing existing economic studies, the authors sought to provide clarity on these questions and highlight areas where future research is most needed.

Key research findings

• PPI can drive innovation, but mostly incremental rather than breakthrough innovations. It is particularly beneficial for small, young, or financially constrained firms.
  
  
• Procurement design matters. Bundling R&D and commercial contracts, giving flexibility to suppliers, and centralizing procurement can enhance innovation outcomes—but only when done carefully.
  
  
• Public buyer expertise is crucial. Lack of procurement staff training, risk aversion, and bureaucratic inefficiencies are major barriers to PPI’s success.

Where do we go from here?

The study suggests that while PPI has potential, it is not a silver bullet for innovation policy. More research is needed on how to design procurement strategies that encourage radical rather than incremental innovation. There is also a need to explore how PPI interacts with other policies, such as R&D subsidies, to ensure the best outcomes.

With governments worldwide looking for ways to foster technological leadership and address global challenges, refining the use of PPI could be a crucial step forward.

Meet the researchers

• Olga Chiappinelli: University of Barcelona and BEAT, Spain
• Leonardo M. Giuffrida: ZEW Mannheim, MaCCI, and CESifo, Germany
• Giancarlo Spagnolo: University of Rome Tor Vergata, EIEF, CEPR, and Stockholm Institute of Transition Economics (SITE), Sweden

Photo: Yeexin Richelle, Shutterstock