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The Impact of Government Procurement Composition on Private R&D Activities

  • Viktor Slavtchev

    ()

    (Friedrich Schiller University Jena, Chair of "Business Dynamics, Innovation and Economic Change" and GK-EIC "The Economics of Innovative Change", Jena)

  • Simon Wiederhold

    ()

    (ifo Institute for Economic Research)

This paper addresses the question of whether government procurement can work as a de facto innovation policy tool. We develop an endogenous growth model with quality-improving innovation that incorporates industries with heterogeneous innovation sizes. Government demand in high-tech industries increases the market size in these industries and, with it, the incentives for private firms to invest in R&D. At the economy-wide level, the additional R&D induced in high-tech industries outweighs the R&D foregone in all remaining industries. The implications of the model are empirically tested using a unique data set that includes federal procurement in U.S. states. We find evidence that a shift in the composition of government purchases toward high-tech industries indeed stimulates privately funded company R&D.

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Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2011-036.

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Date of creation: 06 Sep 2011
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Handle: RePEc:jrp:jrpwrp:2011-036
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