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Research Policy 36 (2007) 949963

Public procurement and innovationResurrecting the demand side

Jakob Edler , Luke GeorghiouPREST/Manchester Institute of Innovation Research, Manchester Business School, University of Manchester,

Harold Hankins Building, Manchester M13 9PL, UK

Received 12 January 2007; received in revised form 26 March 2007; accepted 27 March 2007Available online 18 May 2007

bstract

Demand is a major potential source of innovation, yet the critical role of demand as a key driver of innovation has still toe recognised in government policy. This article discusses public procurement as one of the key elements of a demand-orientednnovation policy. The paper starts by signaling the new significance of public procurement for innovation policy strategies at theU level and in a range of European countries. It then defines the concept of public procurement and embeds this concept within a

axonomy of innovation policies. The rationales and justifications of public procurement policies to spur innovation are discussed,ollowed by a consideration of the challenges and potential pitfalls as well as appropriate institutional arrangements and strategies,ncluding some recent empirical examples of good practice. It concludes by confronting the public procurement approach with twof the most common objections to it and by considering future prospects.

2007 Elsevier B.V. All rights reserved.

vation;
eywords: Innovation policy; Public procurement; Demand and inno
. Introduction

Demand is a major potential source of innovation yethe critical role of demand as a key driver of innovationas still to be recognised in government policy. Pub-ic demand, when oriented towards innovative solutionsnd products, has the potential to improve delivery ofublic policy and services, often generating improvednnovative dynamics and benefits from the associatedpillovers. Nonetheless, public procurement as an inno-ation policy has been neglected or downplayed forany years. In the 1970s, a number of empirical stud-

es explored the meaning of procurement for innovationfor an overview, see Mowery and Rosenberg, 1979;othwell and Zegveld, 1981; Rothwell, 1984). Rothwell

Corresponding author. Tel.: +44 161 275 0919.E-mail address: [email protected] (J. Edler).

048-7333/$ see front matter 2007 Elsevier B.V. All rights reserved.doi:10.1016/j.respol.2007.03.003

Concepts of demand-oriented policy; Public sector innovation

and Zegveld (1981) compared R&D subsidies and stateprocurement contracts without direct R&D procurement.They concluded that, over longer time periods, stateprocurement triggered greater innovation impulses inmore areas than did R&D subsidies (see also Rothwell,1984, p. 330). Geroski (1990, p. 183) also analysed thequantitative and qualitative meaning of state demand forinnovation and concluded that procurement policy is afar more efficient instrument to use in stimulating inno-vation than any of a wide range of frequently used R&Dsubsidies.

In a more recent survey of more than 1000 firmsand 125 federations, over 50% of respondents indicatedthat new requirements and demand are the main sourceof innovations, while new technological developments

within companies are the major driver for innovations inonly 12% of firms (BDL, 2003). An analysis of the Sfinnodata base collecting all innovations commercialized inFinland during between 1984 and 1998 (Palmberg, 2004;

mailto:[email protected]/10.1016/j.respol.2007.03.003

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Saarinen, 2005) shows that 48% of the projects lead-ing to successful innovation were triggered by publicprocurement or regulation.1

Not only demand as such, but also the interactionbetween demand and supply has crucial implications forinnovation dynamics. Starting with von Hippel (1976)and Mowery and Rosenberg (1979, p. 148), a range ofstudies have argued that a major task for systemic inno-vation policy is the organisation of a discourse betweenusers, consumers and others affected by innovations inorder to articulate and communicate preferences anddemand to the market (see also Smits, 2002). Further-more, the scale and characteristics of demand in a givenlocation have been recognised as major determinantsof the competitiveness of locations and their innovationdynamic (e.g. Porter, 1990).

In principle, the potential for using public procure-ment as an instrument for innovation is considerable. At16.3% of the combined EU-15 GDP (Georghiou, 2004),public procurement represents a key source of demandfor firms in sectors such as construction, health careand transport.2 Nonetheless, with a few exceptions, formany years the potential offered and challenges posedin using public procurement for innovation have beenlargely ignored in innovation policy, both conceptuallyand in practice. It has been argued that the introduction ofmore stringent competition regulations across the Euro-pean Union has proven a major factor in the declininguse of this instrument (Edquist et al., 2000). The extent ofrelative decline is indicated by statistics showing EU pro-

curement four times less than the US in civilian sectorsand two times less when defence is taken into account(Directors Forum, 2006). However, in the last 34 years,

1 There is further consensus in the literature, that military demand insystematic conjunction with military R&D programmes was the keyto the development and diffusion of many technologies especially inthe US (Internet, many further ICT technologies, Global PositioningSystem (GPS) and other satellite technologies (Alic et al., 1992; James,2004; Wessner, 2004) and lately diagnosis and therapy methodswithin the military project Bioshields (James, 2004, p. 35)). However,the economic efficiency of procurement resting on military needs andonly indirectly spilling over to private markets has been strongly chal-lenged (Wessner, 2004; Cohen and Noll, 1991; Kelley, 1997; DOD,1999; James, 2004, p. 29). Therefore, and because of the peculiaritiesof the defence market, defence procurement will not be dealt with inthis article (see James, 2004 for an overview).

2 There are alternative figures for the size of public procurement indifferent EU countries, depending on different assumptions concerninginclusion of all government levels. Audet (2002), for examples, reportsslightly lower shares of public procurement within GDP. He also showsthat the shares differs between the EU countries, in his calculationranging from almost 5% in Belgium to slightly more than 13% forSweden.

Policy 36 (2007) 949963

the issue has received renewed attention, especially atthe EU level but increasingly so at national level in anumber of Member States.

This article analyses the concept of public procure-ment as an integrated tool of innovation policy.3 Itexplores the factors which have led to this renaissanceof what has been considered a mature, if not obso-lete approach, and its importance within the portfolioof demand-side policies. The paper starts by signallingthe new significance of public procurement for inno-vation policy strategies at the EU level and in a rangeof European countries. It then defines the concept ofpublic procurement and embeds this concept within ataxonomy of innovation policies. The rationales andjustifications of public procurement policies to spurinnovation are discussed, followed by a consideration ofthe challenges and potential pitfalls as well as appropri-ate institutional arrangements and strategies, includingsome recent empirical examples of good practice. Thepaper concludes by confronting the public procurementapproach with two of the most common objections to itand by considering future prospects.

2. A new wave of interest: public procurement inthe innovation policy debate at EU level

At European Union level a new interest has emergedin the meaning of demand-side approaches to innovationand, more concretely, in the use of public demand as anengine for innovation. The emphasis has been on the linkbetween procurement and perceived under-investmentin R&D by business. The way in which procurementhas entered the policy agenda is in itself an interestingcase-study in how an issue gets taken up by the system.Following the work of an expert group (Georghiou etal., 2003), procurement for innovation was incorporatedas an element of the European Commissions ResearchInvestment Action Plan to raise R&D expenditure tothe 3% Barcelona target (European Commission, 2003).Follow-up work includes a specific action to support thedevelopment and diffusion of information to public buy-ers (for example, on best available technologies) and aninitiative to set procurement in the broader context ofpolicy mixes, thereby exploiting synergies with otherresearch and innovation policy measures, for example,

technology platforms.

The issue gained further momentum within Europewhen early in 2004 three governments issued a position

3 For a broader overview on demand oriented measures in general,including the support of private demand, see Edler (2007a, 2007b, inpress).

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J. Edler, L. Georghiou / Re

aper to the European Council which included a call forsing public procurement across Europe to spur morennovation (French/German/UK Governments, 2004, p.). In November 2004 the Kok Report, which waseviewing progress on the Lisbon strategy, recognisedhat procurement could be used to provide pioneer mar-ets for new research and innovation-intensive productsKok et al., 2004). The March 2005 European Coun-il endorsed the mid-term review of the Lisbon strategynd the proposal to make jobs and growth its centralocus and explicitly called on Member States to renewheir focus on public procurement of innovative productsnd services (European Council, 2005). A new impe-us for demand-side innovation policies was provided byhe Aho Group Report Creating an Innovative Europeresented to European leaders at their Spring summit in006 (Aho et al., 2006). The Panel, previously mandatedy the leaders to report on ways to accelerate the revisedisbon Strategy, argued that an R&D-driven strategyas insufficient and advocated instead a four pronged

pproach focused on the creation of innovation-friendlyarkets, strengthening R&D resources, increasing struc-

ural mobility, and fostering a culture which celebratesnnovation.

Central to the Groups approach was the observa-ion that the reason business is failing to invest enoughn R&D and innovation in Europe is the lack of annnovation-friendly market in which to launch newroducts and services. To create such a market theyecommended actions on harmonised regulation, ambi-ious use of standards, a competitive intellectual propertyights regime and driving demand through public pro-urement. Large-scale strategic actions were called foro provide an environment in which supply-side mea-ures to raise investment in research and innovation cane combined with this process of creating an innovation-eeking demand and a market. The Group identifiedeveral application areas: e-Health, Pharmaceuticals,nergy, Environment, Transport and Logistics, Security,nd Digital Content. In order to secure implementation,he Group called for the appointment of an independentigh Level Co-ordinator to orchestrate European action

n each area across Member States, different parts of gov-rnment and the Commission, business, academia andther stakeholders.

The recommendations of the Aho report were widelyndorsed. Again, the EU Council in Spring 2006 explic-tly backed the report and called for the support of

arkets for innovative goods and services, includingublic procurement (European Council, 2006, p. 6),point reiterated in the European leaders informal

ummit on innovation at Lahti, Finland, in October

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2006. The Finnish Presidency had opened its programmewith an informal Ministerial meeting at which thebackground paper was entitled Demand as a Driverof InnovationTowards a More Effective EuropeanInnovation Policy (Finlands Presidency, 2006). Thisfocussed on horizontal measures to stimulate demandfor innovation such as regulation, standards and IPR butalso raised the possibility of using public procurementfor innovation related purposes.

Further action at EU level included a broad studyon public procurement activities across Europe andin selected non-EU countries (Edler et al., 2006) thatfeeds into a Commission Handbook on Public Pro-curement for Innovation published in spring 2007(European Commission, 2007). In September 2006, theCommission issued a strategic innovation policy paperhighlighting the importance of public procurement forinnovation and the creation of lead market, especiallyin sectors in which the state is an important purchaser(European Commission, 2006a). A specific initiative inthe ICT sector has been the proposal to explore pre-competitive procurement of R&D as an instrumentexempt from some of the competition restrictions affect-ing procurement of innovative goods and services.

The increased interest in public demand to spur inno-vation is also evident at national level. The UK hasthe most systematic and advanced approach. The UKGovernments Innovation Report of 2003 proposed aseries of measures aimed at increasing the research andinnovation impact of public procurement (DTI, 2003a).Consequent actions on various levels and including vari-ous sectoral ministries include the production of a guideby the Office of Government Commerce on capturinginnovation (OGC, 2004) to make innovation procure-ment an issue at the operating level. The procurementstrategies of the National Health Service and the Ministryresponsible for the environment (DEFRA) are leadingexamples of efforts to change practice. Studies and/orpromotional activities for innovative procurement havebeen carried out by the Irish Science and Technology Pol-icy Agency, Forfas, in Spain, by the COTEC Foundation,and in the Netherlands by an internal group of expertsset up by the government. In Germany the ImpulseGroup Innovation Factor State has been working on thepossibility of promoting innovation dynamics from themarket place by adjusting procurement practice in gen-eral, as well as through strategic procurement measuresin selected technology areas (e.g. BMWI/BME, 2006).

The absence of an explicit policy of procuring innova-tions does not signify a lack of action, as many countrieshave started activities especially in the ICT sector, with-out a framing strategy (Edler et al., 2006, p. IX).

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Why, one might ask, has the recent interest in publicprocurement to spur innovation been so great? We mayinfer from the critical tone of the above-mentioned policydocuments that the principal driver is a sense that tradi-tional supply-side innovation policies are insufficient tomeet the challenges posed in promoting competitiveness.Before, outlining the conceptual justifications, we posi-tion public procurement within the toolbox of innovationpolicy.

3. Public procurement in the context ofinnovation policy instruments

Since the 1990s innovation policy has been perceivedas a means to act on and improve the performance ofinnovation systems. As well as explicit innovation poli-cies, many other measures also affect innovation, thoughthis is not their main object. This group includes macro-economic policies, education more generally, regulation(e.g. pollution or health and safety), and competitionpolicy. Crucially this group also includes public procure-ment.

There are long-running debates concerning the degreeto which it is legitimate for governments4 to intervene inthe economy in support of innovation. Economic ratio-nales for innovation policy rest on two main foundations,market and system failures, which in some senses com-pete and in others are complementary. We shall return tothis discussion below in the context of public procure-ment.

The innovation systems perspective emphasises thesignificance of having a large and differentiated groupof innovation actors and an enabling framework forlearning-oriented interactions between them. Thus, pol-icy is primarily aimed at optimising the interaction ofvarious components of the system, i.e. industry, basicresearch, applied research, financing and demand andat creating innovation-friendly framework conditions(Arnold et al., 2001). This understanding makes it clearthat if innovation policy is to prove effective within thesystem, it must be capable of acting upon a large varietyof actors and linkages and thus itself be differentiated.An important dimension of the systems perspective is

that it fully integrates the demand for innovations ona conceptual level (for many Nelson, 1982; Lundvall,1988, 1992). One would have expected that the effect ofthis perspective would be that demand should also have

4 The term government here encompasses all levels includingnational, regional and supra-national and combinations thereof inmulti-level governance.

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moved into the focus of innovation policy debate, yet ifanything the range of policies directed towards demandhas narrowed during the period in which the innovationsystem approach has become the received wisdom.

The lack of a demand-side orientation in inno-vation policy is reflected in two databases compiledon the basis of inputs from national correspondentsunder the sponsorship of the European Commis-sion. The first is the Commissions Trend Chart(http://trendchart.cordis.lu/), which monitors innovationpolicy in EU member states and other regions and pro-vides a comprehensive list and detailed information onnational innovation policy measures. In total, this clas-sification of innovation policy measures extends to 17different types of measures. Not one of these types isexplicitly oriented towards demand. Demand subsidies,state procurement of innovative goods and similar mea-sures are not seen as innovation policy instruments inthis categorisation. In addition, an inspection in 2005of the various measures in those categories, whichcould in principle include the demand side, revealedthat only in a very small number of approaches isthe user directly promoted or supported.5 A second,more narrowly defined, database of business supportmeasures, classified information and consulting activi-ties, training and education, finance, industrial premisesand environment and strategic services (http://europa.eu.int/comm/enterprise/smie/overviewbytype.cfm) alsoshows little activity in support of technology diffu-sion. This cursory overview indicates that despite theinclusion of the user-perspective in innovation literature(Lundvall, 1988, 1992; for an overview, see Smits, 2002),conceptually very little consideration is paid to demandin innovation policywhile supply-side measures arehighly differentiated.

In Plate 1, we present a first taxonomy that attemptsto show both demand and supply-side innovation policymeasures, and also to emphasise that broader policiesnot specifically targeted at research and innovation (herecalled framework conditions) can also influence theseactivities. For our purposes here, demand-side innova-tion policies are defined as all public measures to induceinnovations and/or speed up diffusion of innovations

new functional requirement for products and services orbetter articulating demand. Our taxonomy already indi-

5 A search of the Trendcharts policy measures in 2007 indicatesonly one mentioning general procurement (access for French SMEs todefence procurement) and six using the term in the context of R&Dprocurement (http://trendchart.cordis.lu/tc search site.cfm).

http://trendchart.cordis.lu/http://europa.eu.int/comm/enterprise/smie/overviewbytype.cfmhttp://europa.eu.int/comm/enterprise/smie/overviewbytype.cfmhttp://trendchart.cordis.lu/tc_search_site.cfm

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tive structures. We will return to these conditions below.We should also note the association of state procurementwith the broader issue of innovation in public services,

Plate 1. Taxonomy

ates that if conceptualised in their innovation policyimensiondemand measures may be differentiated inhe same way as supply-side measures (see Edler, 2007a,007b, in press), and that public procurement is only onef a range of measures.

It may be seen that demand-side policies can beresented in four main groupings, systemic policies, reg-lation, public procurement and stimulation of privateemand. It is self-evident, that, as with any taxonomy,his is a simplified picture of reality. In particular, therere many policy measures that combine individual mea-ures. As will be seen further below, public procurementan be a cornerstone of a co-ordinated and technologyr sector specific mix of policies. Furthermore, in thisaper, we focus on procurement, but it should be stressedhat demand-side innovation policies also rest stronglyn the use of regulation and standards and more broadlyn the concept of promoting lead markets (Blind et al.,004; Edler, 2007a; Georghiou, 2007). We include sys-emic policies in the demand-side category because ofheir critical role in bringing users and suppliers together.

. Forms of public procurement

Public procurement of innovation as a strategy innnovation policy can take different forms. We canistinguish general procurement practice versus strate-

ic procurement, direct public procurement (where theoods or services are exclusively for public use) versusatalytic procurement and, finally, commercial versusre-commercial procurement.

vation policy tools.

4.1. General versus strategic procurement6

In state procurement two levels may be distinguished,which, in the literature at least, are usually not distin-guished. At the first level, government procurement isgenerally organised such that innovation becomes anessential criterion in the call for tender and assessmentof tender documents. Such an approach is being triedat present by the UK. As a rule, central procurementoffices are generally responsible for procurement. Theyare located either in ministries of the interior or finance,but not in the ministries responsible for innovationpolicy.

The second level, strategic procurement, occurs whenthe demand for certain technologies, products or servicesis encouraged in order to stimulate the market. Strate-gic procurement is as a rule associated with sectoralpolicy and therefore to a large extent again is neitherinitiated nor co-ordinated by the ministries responsiblefor innovation.

A systematic utilisation of both forms of govern-ment procurement calls for co-ordinated action, i.e.co-ordination between various ministries and authoritiesand their admittedly widely different targets and incen-

6 This and the following paragraphs are based on Edler (2007b, inpress).

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itself connected to public sector reform with, for exam-ple, increased outsourcing from private suppliers. Theinterface with the customer or user is identified as oneof the key distinctive factors in public service innovation(Koch and Hauknes, 2005).

4.2. State procurement in connection with privateusers

There are procurement strategies where the statebuys, not only to fulfil its own (original) mission, butalso to support private purchasers in the decision tobuy (Rothwell, 1984). So-called co-operative procure-ment occurs when government agencies buy jointly withprivate purchasers and both utilise the purchased inno-vations. Catalytic procurement occurs when the state isinvolved in the procurement or even initiates it, but thepurchased innovations are ultimately used exclusivelyby the private end-user.7 The crucial feature of catalyticprocurement is that while the state often itself appearsas buyer, the real market penetration effect is achievedby subsequent private demand. An example of this is theuse of market transformation programmes in the energysector in Sweden in the 1990s (Neji, 1999).

4.3. Commercial versus pre-commercialprocurement

The desire to use procurement for innovation has ledto new initiatives, especially at European level, that havefurther differentiated public procurement approaches.The basic idea behind public pre-commercial procure-ment is that it targets innovative products and servicesfor which further R&D needs to be done. Thus, the tech-nological risk is shared between procurers and potentialsuppliers. By definition, this means that potential pro-ducers are still in the pre-commercial phase, the productsand services delivered are not off the shelf. In practicalterms the procurement in fact is an R&D service con-tract, given to a future supplier in a multi-stage process,from exploration and feasibility to R&D up to proto-

typing, field tests with first batches and then, finally,commercialisation.

The more innovative or idiosyncratic an innovationis, the more likely pre-commercial procurement can be

7 The classification of public procurement into public, catalytic andco-operative procurement has been coined by Edquist and Hommen(1998) and is based on the theoretically founded and empirically pro-ductive work on the innovation-inducing procurement system whichwas presented by a European team of analysts at the end of the 1990s(see Edquist et al., 2000, and also Rolfstam et al., 2005).

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appropriately applied. Within the pre-commercial stagesand given that the benefits of the R&D contract are notsolely for the contracting authority and the contract isnot entirely paid for by the contracting authority, theWTO General Procurement Agreement (GPA) and therelevant European Directives do not apply (for details,see Bos and Corvers, 2007). This is the major differencefrom commercial procurement. The advantage in termsof innovation generation is that it gives procurers morefreedom of selection, definition and interaction. The jus-tification for this more flexible approach stems fromthe argument that R&D-intensive procurement needsmore intensive interaction and cannot be judged on thebasis of written specifications and proposals. To precludemonopolistic structures resulting from pre-commercialprocurement, at least two competitors should enterthe field-test stage. The pre-commercial procurementscheme being discussed at European level follows USapproaches that have been implemented for many yearsby US multi-stage, multi-competitor R&D programmes,not only in the defence sectors (DARPA/DOD), but alsoin other areas such as energy, transport, health and inthe cross-sectoral Small Business Innovation ResearchProgramme (SBIR) (Directors Forum, 2006).

5. Rationales for applying public procurement asan innovation policy tool

The justifications and rationales for the use of publicprocurement to spur innovation relate to three levels:first, public procurement is a major part of localdemand, which constitutes a major factor in the loca-tion decision of MNEs and in the inclination to generateinnovations in a given location. Second, there is a rangeof market and system failures affecting the translation ofneeds into functioning markets for innovative products,and public procurement can prove effective in redressingthis. Thirdly, the purchase of innovative solutions offersa strong potential for improving public infrastructure andpublic services in general.

5.1. The importance of local demand: lead marketsand MNE location decisions

Domestic demand is a prime source for enhancing thecompetitiveness of locations and the enterprises therein.As Porter has shown in his pioneering work Compet-itive Advantage of Nations (1990), the conditions of

domestic demand play a crucial role in the innovationdynamic of countries. Next to factor endowment, theindustrial structure, and firm strategy (competitive situ-ation), sophisticated and challenging demand is one of

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our key variables determining the attractiveness and per-ormance of locations. Demand conditions also relate tohe size of markets, with larger markets enabling localroducers to reach economies of scale early on, andllowing more diverse feedback from users, etc. Moremportantly, demand conditions are determined by theophistication of demand, which, in turn, drives pro-ucers to innovate, to meet new needs or regulationsepeatedly, or in which an innovation-friendly cultures receptive to innovative products. Apparently, in eachation and even region, the quality of the demand fornnovations and the inclination to adopt innovations isifferent, as evidenced by a survey from the World Eco-omic Forum and other work (WEF, 2002; Tellis et al.,003; early: Rothwell, 1984). As early as 1982, Nelsonad argued that the bulk of new technology based com-anies in the US in the 1970s resulted from regional andational markets demanding innovations and acceptingisk.

The inclination of populations and governments tobsorb innovations at a certain location is shaped byany factors, the discussion of which is beyond the scope

f this paper. However, there are locations where popula-ions are more inclined to purchase and apply innovationhan those from other regions. In Finland, for example,t has been shown that consumers and government tra-itionally tend to act as lead users and as prime movershen it comes to buying and applying new products and

ervices. This has made the country for decades nowprime location for the introduction and diffusion of

onsumer electronics, and consequently has created aruitful environment for the production of such prod-cts (Ebersberger, 2007). Thus, some countries are morenternationally competitive in the areas in which theyisplay challenging, future-oriented and internationaleading demand.8 A strong factor endowment alone, i.e.he supply side, is not sufficient for sustainable, leadingdge development and production.

This has also been demonstrated in the lead useroncept of among others von Hippel.9 Early usersake the risk of working with a technology that may not

8 Although this general rule applies, Nachum and Wymbs (2002)ave correctly emphasised that the characteristics of locations are ofifferent importance not only in different sectors but also for differentompanies. For our issue of market endowments this means that whileor some, the leading edge demand may be key for early developmentnd innovation productions, for others the size of the market and thusroduction where economies of scale can be realised quickly is moremportant.

9 von Hippel (1986) introduced the concept of lead users innnovationdefined as those whose present strong needs will becomeeneral in a marketplace months or years in the future.

Policy 36 (2007) 949963 955

be fully optimised in return for access ahead of their com-petitors or for achieving a desired solution to a problemmore quickly. Innovators benefit from the learning andfeedback that this environment offers. For small firmsthere is the added benefit of credibility gained by havingan installation of their technology as the beginning of areference list.

The concept of lead user can be extended to the con-cept of a lead market.10 This requires early adoptionof an innovation so that it becomes widespread throughmultiple users of this type or else through a single userwith sufficient purchasing power to constitute a mar-ket on its own (this is where public procurement canmake a difference). In such cases, the learning benefitsare supplemented by a reduction of risk in the invest-ment necessary to perform R&D and to innovate. Theexpectation is that other markets would then adopt thedesign thereby established giving it international dom-inance (dominant design). Characteristics of a leadmarket include customers willing to pay a premium forthe particular characteristics of the innovation, or even insome consumer markets for its novelty per se. This couldimply a high degree of customer intelligence, meaninganticipatory knowledge of the technology. Compatibleinfrastructure may also be a factor. In general suchmarkets should have sufficient scale for the costs of inno-vation to be viable. Market requirements should also besufficiently generic to allow for expansion/export intowider markets as costs fall through continuing innovationor increasing scale of production. Finally, a lead marketshould provide the more general conditions favourable toinnovation such as an efficient and responsive regulatorystructure, security for intellectual property, etc.

There are, however, inherent risks in the lead mar-ket concept, notably the dominant design requirement.If a market requires product or service characteristicsthat are so specific (idiosyncratic) that the possibility ofextension to other markets is foreclosed, the productionand diffusion of an innovation in a local market doesnot result in a lead market. An example is the UKsSystem X telephone exchange developed by the thenPost Office and launched in 1980 but failing to pene-trate export markets. The French Minitel experience is a

case where domestic success was not matched by exportsin the face of emerging competition from the Internet.11

A further risk in this approach is that in a narrow concept

10 For a further discussion of lead markets, see Porter (1990), Meyer-Krahmer (2004, 1999), Meyer-Krahmer and Reger (1997), Beise(2001) and Beise et al. (2003).11 Wikipedia lists essentially failed efforts to introduce the Minitel in

South Africa, Belgium, Canada, Ireland and the USA.

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of lead markets, the suppliers of the innovation need tobe located in the jurisdiction of the ministries respon-sible for the procurement policy. In fact, as empiricalexamples have shown, it is a major obstacle for agen-cies procuring innovations to pursue their goals whensuppliers from abroad win the contract (Pinnau, 2005).However, the economic benefit is broader, as applica-tion of innovative products and solutions may lead toa technological upgrade of a location and a market.Such innovative products need to be installed and main-tained, competing suppliers are put under pressure tocatch up, complementary services and products need tobe in place, users upgrade their skills and the locationmay gain a more innovative image. All of this benefitsthe local economy. In the case of the procurement ofnew, advanced lightning systems for the municipalityand Federal State of Hamburg in Germany, for example,the responsible agency could convince decision makersand the public of the economic benefits of the purchaseof these systems from abroadin addition to the energysavingsand thus increased life cycle efficiency of thelighting system (Pinnau, 2005).

The role of the state in creating or assisting in creat-ing lead markets mainly lies in the provision of a meansto combine supply and demand-side measures. Thisincludes provision of appropriate framework conditionsthat induce and enable innovative activity (infrastructure,sufficient R&D basis, support for co-operation, etc.).However, in addition, the state can support lead user andlead adoptions of innovations that promise to become adominant design in the world markets. More importantlyfor our discussion on public procurement, the state canthrough the size or the peculiarities of public demanditself act as a lead user initiating lead markets.

5.2. Market and system failures and the role ofpublic procurement

As with the justification for supply-oriented mea-sures, there are market failures (mainly informationasymmetries) and system failure (poor interaction)arguments.12 Public procurement adequately applied may play a role in overcoming these failures.

The first set of failures is related to information prob-

lems. Especially, but not only, in fragmented marketsthere is a deficiency and an asymmetry in the infor-mation available to those intending to undertake or topurchase innovations. Purchasers, private and public,

12 Chapters 5.2 and 5.3 partly draw on Edler et al. (2007) and Edler(2007a, 2007b, in press).

Policy 36 (2007) 949963

are often not aware, or fully aware, about what productand service innovation the market offers to themorcould offer to them. Suppliers of potential new prod-ucts and services often lack the knowledge on whatcustomers might want in the future. Suppliers, on theother hand, often fail to signal future solutions earlyenough. Userproducer interaction and communicationis often poor, with scattered demand not articulated suf-ficiently to make suppliers read the signals and translatethem into innovations (e.g. von Hippel, 1976, 1986;Gregersen, 1992; Lundvall, 1988, p. 356; Moors et al.,2003; Rothwell and Gardiner, 1989; Smits, 2002). Thisis also related to a lack of trust for innovations and inno-vators on the side of private and public demand as wellas lack of skills in order to use and exploit an innova-tion. All this entails risk and even uncertainty forsuppliers.

Furthermore, the more radical an innovation, thehigher the entry and switching costs. This relates to trans-action and learning costs, to adoption of complementaryequipment and to lock in and path dependency effects.Those problems of high entry costs are especially viru-lent in areas in which network effects occur. For productswhose value rises with the units sold in the market, thereis a high diffusion threshold, especially in ICT areas.The initial purchase of radical innovations is thus ham-pered. A strong initial demand in an early phase can haveaccelerating effects.

For a variety of reasons, public procurement mayremedy those market and system failures and lead tothe generation and/or better diffusion of innovations.Some of these reasons apply also to potential privatepurchasers, others are restricted to the state as purchaser(see also Geroski, 1990; Dalpe et al., 1992; Dalpe, 1994;Edquist, 1998).

Public procurement can achieve critical mass, throughthe sheer size of a single purchase or through bundlingthe demand of various public entities. Such publicdemand creates clear incentives for manufacturers,reduces their market risk, and enables early economiesof scale and learning. This critical mass also structuresthe manufacturing branches connected with the inno-vation in question. This effect is especially strong foryoung technologies, i.e. when industry is able to reactto strong impulses on the part of the state. In contrastto R&D subsidies, the concrete state demand for inno-vations leads not only to technological capacities, butat the same time to increased production capacities for

innovations (Geroski, 1990, p. 189).

Public procurement may also lower the transactioncosts of adapting to new products, either by the timelyand large-scale use of an innovation or by demonstrating

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ts use. The public uptake of an innovation further sends aignal to the private market; it demonstrates functional-ties and thus raises early awareness (Rothwell, 1984;orter, 1990). With this spillover to private demand,

he catalytic function of public procurement may beore important than the initial public purchase, as the

xamples of market creation in the consumer electronicsectors especially in Sweden have shown (see below).

Finally, the state supported by its purchasing powermay help to create meaningful standards, with con-

ergence on a standard allowing firms to internalisepillovers and hence to increase the incentive to invest in&D. Those standards further contribute to trust build-

ng for innovative products.

.3. Public procurement to improve public policynd services

A further justification for public procurement thatsks for leading edge products and services lies in themprovement of state functions and in contributing tochieving public missions (see the link to public servicennovation noted above). The procurement of innova-ion may be linked to a normative policy goal, such asustainability or energy efficiency, and this goal may beeached sooner and more effectively through innovation.he political goals are based on (perceived) social needs.s Mowery and Rosenberg (1979, p. 140) stated, a needoes not equal demand that is articulated in and mediatedhrough the market. This argument strengthens the caseor public procurement as a market stimulating instru-ent, as it can be one means to translate perceived needs

nto concrete market demands. This is how the economicrgument of triggering the innovation dynamic meetshe sectoral, political argument of better performance inovernance.13 The justification for buying a costly inno-ation to pay the innovation premium and to invest innnovations at an early phase within the innovation cycle,hen stems from this policy mission. The innovationever of public procurement measures and measureso improve private demand which are designed to meetocietal targets derives from the fact that most often soci-tal goals underlying a procurement translate new needsnto demand for which innovative solutions are called

or (Gregersen, 1992, p. 144). Dalpe et al. (1992, p.58 ff), have empirically shown that in satisfying newocietal needs and providing infrastructure and publicervice, the state very often is more demanding than pri-

13 McCrudden (2004) presents a number of cases in which the stateas procured with a view to causing societal goals to be reached.

Policy 36 (2007) 949963 957

vate consumers. In achieving its mission, in improvingits function, the state very often acts as a lead user.

This close connection, namely to understand demand-oriented policy as innovation policy to achieve certainpolicy goals such as sustainability, energy efficiency,mobility, etc., is still insufficiently examined in the litera-ture and poorly designed and taken advantage of in policypractice. Traditionally, sectoral policies that utilise pub-lic demand and mobilisation of private demand, havestressed their own specific mission without linking thedynamics that were triggered to innovation policy andrelated goals. In Europe, the green procurement move-ment (e.g. BMU, 2006; DTI, 2006) or activities inthe ICT sector at EU level (Bos and Corvers, 2007)only recently have shifted in this direction (see below),expecting thereby to increase the momentum and publicbacking for the sectoral policy aims. This points towardsthe question about framework conditions and strate-gies conducive for public procurement policies gearedtowards innovation.

6. Implementation framework for innovationprocurement policyand some practicalexamples

Thus far we have seen that despite the strong interestin procurement for innovation, it does require certain cir-cumstances conducive for its success. One requirementwe have noted in Section 4 is the need for co-ordinationacross government, to resolve the problem of socialreturns not necessarily being within the ambit of thepurchasing ministry. We have also noted in the samesection that combination with private demand providesan additional dimension to procurement policy. We fur-ther stressed the critical role of linkages between supplyand demand prior to and during the innovation pro-cess. In addition to these structural requirements thereis also a need for changed practice at the level of the pro-curement professional. To overcome the challenge andto reap the benefits of public procurement in terms ofinnovation generation and diffusion, a complex imple-mentation framework needs to be in place. We cannot becomprehensive in this article, but here focus on the fourdimensions that appear to be of highest significance andaddress the issues raised here.

6.1. Changing rationales and comprehensiveinter-department strategies

The basis for such an innovation-friendly procure-ment framework is the general understanding acrossadministrations that the public purse can make a dif-

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curement will have to be accompanied by further demandmeasures. The example of market transformation inSweden is a point in case here.14 The Swedish energy


ference in the marketplace towards a more innovativeculture. This of course cuts across different administra-tive cultures and rationales. Ministries responsible forinnovation must acknowledge that the lever of publicprocurement, the purchasing budgets, sits elsewhere andthat in order to mobilise these budgets co-ordination andconvincing is needed. Decision makers in sectoral min-istries or divisions are confronted with an additionalmajor target innovation-generation that alters thepolitical equation when it comes to formulating theirgoals, pushing through their policy and implementingdecisions. These additional dimensions might be help-ful, but at first sight might also result in target conflicts.As discussed above, these target conflicts may arise ifthe optimum purchase for the sectoral goal is not in linewith the optimum in terms of innovation dynamics in agiven innovation system. Most importantly, the immedi-ate economic benefit may be realised by suppliers whohappen to be located outside the jurisdiction of the pur-chasing ministry or agency. Furthermore, the learningand switching costs for administrations may be perceivedas being prohibitively high. The basis to overcome all ofthese principle obstacles is a strategic commitment tochange rationales across and within administrations, tointegrate the innovation rationale within sectoral policyrationales and subsequently a strong co-ordination ofefforts to create inter-administrative winwin situations.

The new initiatives discussed above of pushing pre-commercial procurement forward also in Europe, albeitto pursue the potential benefit of contracting more pub-lic R&D services leading to market innovations, addfurther to the policy challenges. As procurement cov-ers the whole stage from R&D to application, there iseven more need for co-ordination between responsibleministries. In countries like the US or Japan, whichhave applied pre-commercial procurement much moresystematically and comprehensively, this co-ordinationneed is met through bundling of competences. In theUS, mission-oriented approaches facilitate co-ordinationas sectoral ministries are responsible for R&D in theirareas, in Japan, METI has a broader portfolio and widerresponsibilities than traditional ministries of economicsin Europe. In other OECD countries, the challenge ofco-ordination is immense.

The most sophisticated and consequent approach ofhorizontal, goal-oriented governance in this sense inrecent years has been the innovation strategy of theUK (Winson, 2005). Here, the Department of Trade

and Industry incorporated public procurement as anofficial policy dimension into their innovation strategy(DTI, 2003a), building upon a background report on theeconomic benefits and the innovation potential of the

Policy 36 (2007) 949963

125 billion per year spent by the public administra-tions on goods and services (DTI, 2003b). In addition,discussions with industry had revealed shortcomings inthe procurement process hampering innovative bids tobe successful or innovative solutions to be detected inthe first place. Subsequently a detailed strategic planincluding a concrete roadmap was drafted that com-mitted sectoral ministries under the leadership of theDTI, including the local level and special provisionsfor SMEs (DTI/OGC, 2003). The strategy aimed bothat general procurement, i.e. sensitising and enablingprocurers at all levels as regards to innovation pro-curement (see below), and strategic procurement, i.e.selecting strategic areas of sectoral policy and combiningthe innovation goals and the sectoral policy goals. Thecommitment of sectoral ministries has been mobilisedthrough political backing at the highest ministerial levels,an implementation roadmap with clear targets and regu-lar co-ordination meetings of working groups includingministers or undersecretaries of state. How far a countryneeds to travel is illustrated by a general perception thatthese measures have yet to bear fruitthere are constantcalls from industry and most recently from the Conserva-tive Opposition party to make procurement a much moreprominent innovation policy tool (STEM Task Force,2006).

6.2. Linking up with private demand

As mentioned above, a further strategic and organi-sational challenge for integrated procurement strategieslies in the combination of public procurement and pri-vate demand measures. Such catalytic approaches hadbeen tested in the US already in the 1970 in formof the Experimental Technology Incentives Program.These had mixed results, but there were some interestinglessons to be learned (Rothwell, 1984). Most impor-tantly, while in pure public procurement the needs aredefined directly by the public bodies themselves, in cat-alytic procurement the needs of private buyers need tobe systematically ascertained. Public purchasers must bewell aware of the needs and of the readiness of consumersto purchase an innovation, and design their measureaccordingly. The more a public policy is designed tochange behaviour of consumers, the more catalytic pro-

14 For a broader discussion of the Swedish catalytical procurementcase, see Neji (1999), NUTEK (1994), Suvilehto (1997), Suvilehto andOverholm (1998) and Edler and Hafner (2007).

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gencies NUTEK and STEM implemented a complexolicy scheme aiming at an accelerated diffusion ofnergy efficient technologies. The major characteris-ic of this initiative was a technology specific mix ofnstruments, with public procurement as an ice-breakernd catalyst and with a mobilisation of private demandhrough a whole set of awareness measures, organisediscourse with users and in selected cases comple-ented by direct subsidies to procurers. The instrumentix and the targeting of specific markets was not equally

uccessful for all technologies, but evaluations showedhat for many technologies market diffusion has signifi-antly accelerated (Neji, 1999).

.3. Coping with complexity and procurementiscourse: bringing public needs and supplierapacities into line

A further requirement for innovation procurement iso define which markets and technologies to tackle. Onhe one hand, suppliers need to be given early signalsegarding concrete future public demands. On the otherand, there is an uncertainty on what suppliers are actu-lly ready to provide in the future. The major requirementor a strategic procurement policy thus is to bring futureeeds and future supply together at an early stage. Theasic idea can be summarised by quoting an industryember of the UK Sustainable Procurement Task Force

nd Chairman of the Environmental Advisory Groupnitiated by the DTI and DEFRA (see below): Tools,uidance, good practice, awareness raising and the likere all fine, but the real issue for the public sector is that itsupply chains dont deliver, and there is no clear sense ofhat future performance will be required, says Frost.

New technologies come on stream fast when theresnough confidence and clarity within a supply chainbout the direction of developments which makes itorthwhile for a supplier to make the investments in&D to achieve new performance standards.15

Furthermore, to some extent the complaint of Gib-ons and Gummett still holds true, according to whicht is extremely complex to detect needs and to trans-ate them into meaningful market demands (Gibbons

nd Gummett, 1984). However, as public procurementocuses on public demand, governments can put in placeelective, limited discourses that define mid- and long-erm public needs derived from policy goals and admin-

15 Jack Frost, Johnson Matthey Fuel Cells, see http://www.reenfutures.org.uk/supplements/takefuture page2532.aspx (accessedovember 30, 2006).

Policy 36 (2007) 949963 959

istrative strategies. If potential suppliers are included, thelikelihood is high to define demands concretely enoughthat can be met by industry in the future. The broaderthe participation in these processes, the more likely thatfuture demand can be aggregated, signals are spreadwidely and competition for future solutions remainsopen. In addition, public decision makers need to learnthe readiness of industry to deliver innovations. Publicprocurement can be extremely detrimental to a noveltechnology if the procurement sets in too early in theinnovation cycle, i.e. when it is not ripe yet for broadermarket diffusion. One approach to inform about futuredirection of technologies as well as of future needs is theuse of foresight strategies to develop common visionsbetween producers and users (e.g. Georghiou, 1996).

Current examples of such discourses are the Technol-ogy Platforms at the EU level (European Commission,2006b).16 One example with well-established structuresand intensive dialogue linking national and Europeanlevel is the European Construction Technology Platform(ECTP, http://www.ectp.org). In the ECTP a number ofstakeholders join, including industrial suppliers (con-tractors, materials and equipment manufacturers, serviceand technology providers, designers, architects, engi-neers), scientists (research centres and universities),financial institutions and, last but not least the demandside (owners, operators, clients, users/consumers, citiesand regions). In the area of Cities and Buildings, forexample, the central document of the Platform not onlydefines a common vision as to how cities will look likeand function up to 2030, but also explicitly the impor-tance of procurement to mobilise the innovative potentialof the sector (ECTP, 2006).

Another more advanced and concrete example is thatof the stakeholder discourses established in the contextof sustainable and innovative procurement in the UK.Here, for a couple of years the discourse on sustainableprocurement has been linked to procurement of innova-tion. To that end, an Environmental Innovation AdvisoryGroup (EIAG) has been founded by DTI and Departmentof Environment, Forestry and Rural Affairs (DEFRA)comprised of a number of industrial leaders and assistedby an institutionalised secretariat. One major step of this

group has been to introduce a so-called forward commit-ment process. This approach mirrors the supply chainmanagement of private companies in that it develops

16 Links to all Technology Platforms can be found inhttp://www.eupvplatform.org/index.php?id=75, for a comprehensiveoverview see also: http://ftp://ftp.cordis.lu/pub/technology-platforms/docs/tps status report final 090305.pdf.

http://www.greenfutures.org.uk/supplements/takefuture_page2532.aspxhttp://www.greenfutures.org.uk/supplements/takefuture_page2532.aspxhttp://www.ectp.org/http://www.eupvplatform.org/index.php%3Fid=75http://ftp%3a//ftp.cordis.lu/pub/technology-platforms/docs/tps_status_report_final_090305.pdfhttp://ftp%3a//ftp.cordis.lu/pub/technology-platforms/docs/tps_status_report_final_090305.pdf

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long-term demand for products and services and signals,early on, these needs to industry and attempts to bring inline demand and supply. First pilots have been conductedin diverse areas such as HM Prison Service or LondonFire and Emergency Planning Authority (DTI, 2006).

6.4. Activating and enabling the procurement chain

To include high level decision makers is importantnot only to gain compliance of administrations, but alsoto signal the backing up of the risk involved in concreteprocurement action to the entire procurement chain andsubsequently to change incentive structures and prac-tices along this chain.17 Procurement of innovations runscounter to the traditional behaviour of public officials,decision makers and procurers alike. Incentive struc-tures in public administrations tend to award contractsto those with low initial costs following a simplis-tic understanding of efficiency and high reliability ofthe public service. Innovations, however, are often morecostly in terms of their initial price, and they contain therisk of not delivering the service at all, or with delay,and with switching costs for citizens. The more radi-cal an innovation is, the more this is the case. Thus,stamina and sophisticated risk management are needed inorder to cope with innovations in public services. A newcostbenefit rationale that translates into life-cycle cost-ing and the criteria of the so-called Most EconomicallyAdvantageous Tender (MEAT) is needed to replaces thelowest initial cost rationale.

Furthermore, as discussed above, decision makersand procurers need a much more encompassing knowl-edge of future needs and of potential improvement asregards public service as well as of the market that offersor may offer new solutions. A structure in which pro-

curers are very close to or even involved in the dailybusiness of their administrations increases their abilityto understand needs of administrations and the relatedtechnologies.18 Specialised procurers, on the other hand,

17 Wilkinson et al. (2005) give a very detailed prescription on howto tailor the various phases of the procurement cycle towards moreinnovation. Here only major issues are highlighted. The Office of Gov-ernment Commerce has issued guidelines for procurers in order to actas an intelligent customer striving for innovations in the procure-ment process (DTI/OGC, 2003), and this model is followed by othercountries as well (e.g. Germany, BMWI/BME, 2006).18 In Edler et al. (2006), there is an example of the procurement of a

Voice over IP system within the municipality Heidelberg, Germany, inwhich the procurer was at the same time responsible for the internalmaintenance and development of the system. This enabled a two-waytranslation of needs and skills on the one hand and market offers onthe other hand.

Policy 36 (2007) 949963

need close co-ordination with those responsible for thefuture development of public service and would haveto mobilise expertise on technologies and markets, ifneeded through professional service providers.

In addition, for the tender process to induce innova-tion in the market place, it is indispensable that it is basedon specifying functionalities rather than designs. In theenvironmental sector in the UK, for example, 66% ofcompanies in a recent survey stated that public procure-ment was a major hindrance as the tender specificationlocked suppliers into traditional technologies not allow-ing for scaling up to radical innovation (DTI, 2006, p.17). The hindrance mentioned as being second in impor-tance was finance (60% of companies).

All this also requires organisational change and sys-tematic training of procurers at the operative level.There are several attempts already in Europe to facili-tate this change through mobilising existing procurementorganisations for the dissemination of new practices.For example, in a recent initiative in the Netherlands(PIANO) procuring agencies are networked and shareexperience, good practice and new approaches (Bodewesand Boekholt, 2006), through electronic exchange, anelectronic platform, annual events, and regional procure-ment sessions devoted to specific topics.

As regards procurement regulation, at the EU levelthe new directives 2004/18/EC and 2004/17/EC havecreated opportunities for public authorities to purchaseinnovative solutions, with key changes including:

The facility to specify requirements in terms of func-tional performance or standards that allows suppliersto produce any configuration of technology they feelcan meet the need.

Options to permit variants, thus opening up bids toalternative ideas.

Conditions that allow transfer of intellectual propertyto the suppliers, and hence allow them to exploit theirinnovations in wider markets.

Possibilities for technical and competitive dialoguesbetween purchaser and supplier, a necessary conditionif each side is to understand the other.

7. Conclusions

In this article, we have outlined the rationales, poten-tial and necessary framework conditions for the use ofpublic procurement as one type of innovation policy

measure. The recent ongoing public debate especiallyin Europe but also in catching up countries such asChina has revitalised this concept. There are obviousopportunities opened up through public procurement for

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obilising innovation and at the same time better achiev-ng public policy goals and delivering better service tohe citizens.

There is a clear potential danger that globally, butspecially within Europe the national champion policyight make a comeback through public procurement

avouring local companies. In principle, the WTO rulesGovernment Procurement Agreement, GPA) and the EUirectives do not allow this. However, in countries thatre not bound by the WTO GPA this is an obvious issuend opportunity. China, for example, has recently put inlace a policy that explicitly discriminates against for-ign owned companies when it comes to procurement ofnnovations. In fact, such procurement is a cornerstonef a new catching up strategy that increasingly reliesn the increase of innovative capabilities of indigenousrms (Edler et al., 2007). From the perspective of inter-al market and free trade, this is a problemespeciallyithin the EU. Not to violate the rules of free trade

nd open competition on the one hand and still to jus-ify procurement in terms of innovation is next to thenstitutional adaptation discussed above the major chal-enge for procurement policies integrated in innovationolicy strategies.

To reiterate our argumentation above, there are twoossible answers to this challenge. One is the definitionf benefit for the country, region or municipality thatrocures. This benefit not only lies in the direct produc-ion of a supplier, but in the accompanying services, thenstallation and maintenance needed and so on. Learn-ng and technological improvements tend to spill overithin the market in which the procurement takes place.econd, following the logic of technologically drivenompetition in conjunction with demanding demand,dvanced public procurement may enhance the techno-ogical level of competition, and also set incentives forocal producers to face the technological challenge posedy advanced demand. Competition among producers andccompanying services and suppliers of the innovations upgraded. In the long run, this benefits all relatedconomic agents in a location.

To deal with one last apparent objection, is publicrocurement about choosing one solution over the otherhrough state intervention rather than letting marketsecide; is it another variation of a picking-winner strat-gy? Not really. Picking winners was about selectingrms (national champions, sometimes ailing nationalhampions) or about selecting technologies (specific

olutions). Strategic public procurement is about select-ng whole market areas in terms of their importancen the economy and their apparent ripeness for innova-ion. No specification is to be made of which firms or

Policy 36 (2007) 949963 961

even of which solutions should be pursued in the firstinstance (Georghiou, 2006). Eventually under compet-itive conditions preferred solutions and suppliers willemerge but this happens in all markets. What must beachieved is an open process the result of which is thatwinners emerge. It is possible to deal with other con-cerns by the ways in which lead markets are promotedas a policy. First, a demonstrated level of commitmentfrom business should be a prerequisite for actionasector where the desire for co-ordination has alreadyemerged. Secondly, the measures taken within that sec-tor should preserve competition wherever this is feasible.For example, in procurement second sourcing, perhapsfrom an innovative SME could keep alternative optionsopen.

The aim of this article was not to reignite the olddiscussion on the relative importance of demand vis-a-vis supply-side factors for innovation. Rather, we simplyargue the need to take demand, more concretely publicdemand, more into the focus of innovation policy makingand use it to complement existing and new supply-side measures. For reasons of space and focus we haveconcentrated on one aspect of demand-side innovationpolicy but the agenda is also potent in the use of regula-tion and standards as well as the various forms of publicsupport to spur private demand for innovation (Edler,in press). It is not an exaggeration to say that findingways to mobilise these potentially powerful incentivesfor innovation is the principal challenge currently facingthose engaged in policy design.

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Public procurement and innovation-Resurrecting the demand sideIntroductionA new wave of interest: public procurement in the innovation policy debate at EU levelPublic procurement in the context of innovation policy instrumentsForms of public procurementGeneral versus strategic procurement6State procurement in connection with private usersCommercial versus pre-commercial procurement

Rationales for applying public procurement as an innovation policy toolThe importance of local demand: lead markets and MNE location decisionsMarket and system failures and the role of public procurementPublic procurement to improve public policy and services

Implementation framework for innovation procurement policy-and some practical examplesChanging rationales and comprehensive inter-department strategiesLinking up with private demandCoping with complexity and procurement discourse: bringing public needs and supplier capacities into lineActivating and enabling the procurement chain

ConclusionsReferences

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