Industrial Specialisation and Public Procurement: Theory and Empirical Evidence

Public-sector purchases from private firms account for over 10 percent of GDP in most developed countries, and they are typically biased in favour of domestic suppliers. This paper explores the impact of discriminatory public procurement on the location of industries. Our main theoretical finding is that, in a setting with increasing returns and trade costs, home-biased procurement can override other determinants of industrial specialisation. Our empirical analysis underscores the significance of discriminatory procurement. Drawing on a cross-country, crossindustry data sample for the EU, we find that determinants of industry location such as factor endowments, market access and intermediate inputs are significant in sectors where public procurement is small, but they lose their significance in sectors where public procurement is important.