Public Procurement of Innovation: Evidence from a German Legislative Reform

Using public procurement to promote private innovation activities has attracted increasing attention recently. Germany implemented a legal change in its procurement framework in 2009, which allowed government agencies to specify innovative aspects of procured products as selection criteria in calls for tender. We analyze a sample of 3410 German firms to investigate whether this reform stimulated innovation in the business sector. Across a wide range of specifications – OLS, nearest-neighbor matching, IV regressions and difference-in-differences – we find a robust and significant effect of innovation-directed public procurement on turnover with new products and services. At the same time, our results demonstrate that public procurement mainly stimulates innovations of more incremental nature rather than true market novelties.