Public procurement of innovation: a review of rationales, instruments and design

Public Procurement of Innovation (PPI) has received recent renewed impetus and interest in most OECD countries although the academic literature pays little attention to its economic rationales. Since public procurement is being seen increasingly as an instrument of innovation policy, it is important to understand which situations favour its implementation. Based on a review of the literature on innovation policy, the present paper develops a failure-based framework that allows the resolution by PPI of three types of failures: demand-side, supply-side and user-supplier interaction traps. We propose a four-category typology of PPI based on the type of demand-side failures addressed, and whether or not it also targets supply-side failures. Each category is refined based on the degree of user-supplier interactions required. This typology based on the economic foundation of PPI allows the linking of failure, innovation and public procurement characteristics alongside the types of instruments derived from the academic literature on PPI. One of the strengths of this PPI typology is that it links to the various classifications proposed in the PPI literature and contributes to the smart design of PPI policy. It also considers PPI as a hybrid innovation instrument, that is, a demand-side policy tool, which, if appropriately designed, can be applied to resolve supply-side failures.