Functional procurement for innovation, welfare, and the environment

Abstract

Public procurement accounts for a very large share of most economies worldwide. This conceptual article argues that the key to achieving more innovations when pursuing public procurement is to describe problems to be solved or functions to be fulfilled (functional procurement) instead of describing the products to be bought (product procurement). Contracting authorities need to identify the problems that policy should address. The new products (innovations) solving the problems are to be designed by the potential innovators/suppliers, not by public procurers. Hence, the societal needs and problems must be translated and transformed into functional requirements. Functional procurement is allowed in European regulations, and therefore, there are no legal obstacles to use it for innovation policy purposes. Furthermore, it leads to increased competition not only among potential suppliers of similar products, but also among different products that solve the same problem.

Does Green Public Procurement Trigger Environmental Innovations?

“…There is a weakly significant negative impact of winning non-green awards on environmental product innovations. This result follows the argumentation of Edquist and Zabala-Iturriagagoitia (2020). Public procurement tenders without additional selection criteria can prevent innovation.…”

“…Public procurement has a large potential as demand-side innovation policy tool (Edler and Georghiou, 2007;Edquist and Zabala-Iturriagagoitia, 2020) and accounted for around 16 percent of the European Union's gross domestic product in 2017 (Becker et al, 2019). Demand-side innovation policies aim to foster the development and diffusion of innovations by increasing the size of their market and reducing their associated demand uncertainties (Caravella and Crespi, 2020;Schmookler, 1996).…”

“…Whereas public authorities award their regular procurement contracts solely based on the lowest price, directed procurement takes additional award criteria into account (European Commission, 2017b). These additional criteria favor functional and potentially innovative product and process specifications and can include aspects regarding environmental, social, and economic characteristics (Edquist and Zabala-Iturriagagoitia, 2020). Using directed public procurement, therefore, enables public authorities to deviate from choosing the offers with the lowest price and allows them to put weight on other characteristics in the selection of their awardees.…”

“…Moreover, it is supposed to be "a powerful instrument for stimulating innovations," according to the Commission of the European Parliament (2008, p. 9). There is a growing literature assessing the design of green public procurement and the barriers to its uptake (e.g., Edquist and Zabala-Iturriagagoitia, 2020;Hall et al, 2015;Rainville, 2017;Rossell, 2021). However, despite its high political priority, empirical studies on its impact are limited, focused on specific classes of environmental criteria, and targeted at the effect on environmental outputs and not innovation (for a review, see Cheng et al 2018).…”

Innovations in small businesses: do public procurement contracts and intellectual property rights matter?

“…The main rationale behind public innovation procurement as an EU and national policy instrument can be inspired by the total amount of governmental demands. Public procurement constitutes a substantial proportion of total demand for goods and services and is progressively seen as a feasible and appealing instrument for promoting innovation policies (Edquist and Zabala-Iturriagagoitia, 2020). A fundamental tenet of research on the linkages between innovation, demand, and market structures is built on the Schumpeterian line of reasoning of the positive effect of market power on innovation outcomes.…”