AbstractTo 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.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5774.
Date of creation: Jul 2006
Date of revision:
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Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
- O38 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-28 (All new papers)
- NEP-CSE-2006-10-28 (Economics of Strategic Management)
- NEP-INO-2006-10-28 (Innovation)
- NEP-NET-2006-10-28 (Network Economics)
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