Innovation, competition and public procurement in the pre-commercial phase

Should the supply or the demand side bear the risk connected to innovation? The two polar cases identified in the literature are the supply push and the demand pull. The former is the typical one, with the supplier bearing the costs and obtaining the benefits from innovating. The latter is technology procurement, where the buyer takes the risk, by procuring the innovative good or service. With respect to this, pre-commercial procurement is a peculiar solution that can explain the debate found in the literature relative to its configuration either as a supply-side or a demand-side instrument. The separation from the commercial phase allows the procurer to take only (part of) the risks connected to R&D services. Also, competition among suppliers gives the opportunity of evaluating different solutions and to obtain, in the commercial phase, a lower price for the innovative good. The counterpart of all this is a large portion of risk being left to the supplier. As a consequence, suppliers need to obtain a larger share of the benefits of the innovation process. This economic reason, besides the legal restrictions on State aid, explains the need for a shared risks-shared benefits approach, centred on the agreements on the assignment of IPRs.