Working Paper: CEPR ID: DP5774
Authors: Lus M. B. Cabral; Guido Cozzi; Vincenzo Denicol; Giancarlo Spagnolo; Matteo Zanza
Abstract: To stay on top of global competition, firms and governments often need to acquire innovative goods and services, including ideas and research, from their strategic suppliers. A careful design of procurement policy is crucial to make potential suppliers generate and sell the most suitable innovation. Moreover, procurement by public agencies and large firms often set the incentives for the development of innovations economy-wide. In this paper, guided by recent micro- and macro-economic research, we discuss vices and virtues of the many ways to induce potential suppliers to create and sell innovations. We consider a menu of procurement methods and policies for best procuring new knowledge and innovative products, discussing their costs and benefits in different possible scenarios and suggesting criteria to choose among them. We explain how to optimize the degree of competition between suppliers, as well as other more practical indirect ways to stimulate innovation. We discuss the effects of standard setting activities by large, often public, procurers on innovation races. We evaluate how public and large private firm?s procurement may induce innovation and growth at the national, industry or supply network level by affecting input market prices and the returns to human capital formation. Finally, we point out how risk management methods used in procurement should be modified when innovation is a central concern for a buyer.
Keywords: procurement; risk management; auctions; competitiveness; contests; ideas; innovation; innovation policy; innovative supply; knowledge; prizes; procurement R&D; sourcing; standards; supplier investment; technology
JEL Codes: D44; H57; L15; L17; O31; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| well-structured procurement policies (H57) | supplier innovation output (O36) |
| procurement design (H57) | supplier innovation output (O36) |
| structure of procurement contests (H57) | competition among suppliers (D41) |
| competition among suppliers (D41) | innovation (O35) |
| public procurement (H57) | input market prices (D41) |
| public procurement (H57) | human capital returns (J24) |
| procurement risk strategies (H57) | innovation effectiveness (O36) |