The demand-pull effect of public procurement on innovation and industrial renewal

This article empirically analyzes the link between public procurement (PP) and innovation activities, by taking into account the moderating effect played by import penetration on PP. Using industry-level information on patent applications for 24 countries over the period 1995-2012, we test the impact of PP on innovation activities and whether and in which direction import penetration on PP impacts on patenting. The econometric analysis relies on Poisson regression techniques aiming to investigate the correlation between patent counts, supply-as well as demand-side determinants, and controlling for country and sector heterogeneity. The obtained results confirm our main hypotheses. The dynamics of patenting is positively affected by the PP, while a high degree of import penetration reduces the innovation enhancing effect exerted by public demand. Our results suggest that public demand may represent an effective tool for industrial policy to stimulate innovative activities, shape the transformation of production systems, and foster industrial renewal. Moreover, the empirical evidence shows that the strategy regarding the degree of openness in PP toward nondomestic firms is a crucial policy choice capable of affecting the innovative potential of public demand.