Public Procurement as a Gateway to Innovation
ResearchZEW Study Shows: Criteria-Based Tenders Facilitate Market Access for Young Innovative Firms
Public procurement can serve as an important lever for strengthening young innovative companies in Germany. Accounting for around 18 per cent of Germany’s GDP, it is one of the largest instruments of public demand policy by volume. A recent ZEW study shows that, of the 4,260 young companies surveyed, 16.3 per cent had submitted at least one bid for a public tender since their founding, and 10.4 per cent had been awarded at least one contract. The type of procurement procedure is crucial. Whereas purely price-based tenders show no positive association with the innovation characteristics of start-ups, criteria-based procurement procedures, for example those including additional criteria relating to innovation, environmental impact or quality, are more frequently associated with applications from and contracts awarded to innovative companies.
“Public procurement is more than a purchasing process. If designed appropriately, it can provide start-ups with early demand while also sending a credible quality signal to customers and investors,” says Dr. Bastian Krieger, head of the Junior Research Group “Co-Creation” in ZEW’s “Economics of Innovation and Industrial Dynamics” Research Unit.
Dr. Lena Füner, also a researcher in ZEW’s “Economics of Innovation and Industrial Dynamics” Research Unit, adds: “However, our findings also show that innovative solutions do not automatically succeed in procurement procedures. Innovation must be visible and verifiable in the award criteria. Those seeking to specifically promote young innovative companies should increase the proportion of criteria-based tenders while simultaneously reducing administrative barriers for smaller companies.”
Price-based contract awards without an impact on innovation
Price-based procurement procedures primarily follow the logic of cost leadership. The contract is awarded to the lowest-priced bid for a clearly defined service. This is often unattractive to start-ups offering innovative products or services, as additional quality or novelty is rarely rewarded in the procedure. Criteria-based procurement procedures operate differently. In addition to price, they take account of other aspects such as quality, environmental impact or the degree of innovation. The study shows that it is precisely these procedures that are more frequently associated with the participation and success of innovation-oriented start-ups. This is particularly evident in the high-technology sector: Among the start-ups that secured public contracts, 76 per cent received at least one contract through a criteria-based award procedure.
Innovation must be evident in the tender
Whilst internal research activities may motivate start-ups to bid, what counts most for the award of a contract are innovation features that are visible to contracting authorities in the tender – such as market innovations that have already been introduced or verifiable qualifications. This provides a clear starting point for procurement practice: If innovative start-ups are to be reached more effectively, procurement authorities should design criteria and verification formats in such a way that enables them to identify different types of innovation, for example, product and process innovations.
