Public sector procurement represents a considerable share of demand in certain subsectors – and thus has a strong impact on the products and services offered by firms. In 2017, for example, public procurement corresponded to 16 per cent of European Union GDP. In recent years, environmental criteria have become increasingly common in public sector calls for tender. One goal of such criteria is to encourage companies to develop green innovations.
Bastian Krieger and Vera Zipperer analysed how green public procurement impacted private-sector environmental innovation in 2008 and 2014. When a company introduces a new product or process that has environmental benefits compared to the company’s usual way of doing business, this is termed an ‘environmental innovation’.
No impact on the introduction of new, environmentally friendly processes
The ZEW study drew on German data from the EU’s Community Innovation Survey, a representative survey of innovations activities among firms with at least five employees. The researchers also drew on data from the European Union’s TED database and from the German Patent and Trade Mark Office. Analysis of these data show that companies acquiring public sector contracts with green criteria are 20 percentage points more likely to introduce environmentally friendly product innovations. However, green public procurement has no statistically significant impact on the introduction of new, environmentally friendly processes (e.g. manufacturing techniques). One possible explanation for this discrepancy could be that tender criteria tend to focus on product characteristics, rather than underlying processes.
Results vary by company size
Further sifting of the data shows divergent impacts by company size. The introduction of green products or processes does not become more likely among large companies (250+ employees) following the successful acquisition of a public-sector contract with green criteria. By contrast, SMEs (small and medium-sized enterprises with fewer than 249 employees) have a 25 percentage point greater chance of introducing environmentally friendly products after winning a public-sector contract with green criteria. Notably, this effect is only observable for products, but not for processes.
Ultimately, the study confirms that green public procurement is effective as a demand-side policy tool for encouraging innovation, especially among small and medium-sized enterprises. This suggests that when designing green calls for tender, public procurement officers should consider the needs of small and medium-sized enterprises. Further research is still needed to determine the source of the missing incentive mechanism of green procurement criteria for large companies.