The document summarizes findings from a study examining the impact of public procurement on private sector innovation using US federal procurement data from 1999-2009. The main findings are: 1) Private sector R&D employment responds positively to increases in the technological content of public procurement contracts, as measured by the share of procurement spending in high-tech industries. 2) This suggests that shifts in the composition of government procurement toward more innovative, high-tech goods and services can stimulate private sector innovation. 3) Policymakers should consider how changes in the industry focus of public procurement may influence private sector R&D, in addition to traditional support programs like grants and tax credits. Public procurement can act as an effective, if

1. What administrative databases reveal about the
innovation impact of public procurement:
Evidence from the US*
Simon Wiederhold
Ifo Institute Munich
Workshop on the Measurement of Procurement of Innovation
4 February 2013, OECD Headquarters (Paris)
*Presentation is based on a revised version of the paper:
“Technological Intensity of Government Demand and Innovation,”
Ifo Working Paper No. 135, 2012 (with Viktor Slavtchev)
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2. A First Look at the Data

3. Federal Procurement Data System—Next Generation
All federal procurement contracts above the micropurchase threshold
($2,500; before 2004: $25,000)
I More than 98% of all federal procurement actions (in terms of value)
3 of 22 Wiederhold Innovation impact of procurement in the US

4. Federal Procurement Data System—Next Generation
All federal procurement contracts above the micropurchase threshold
($2,500; before 2004: $25,000)
I More than 98% of all federal procurement actions (in terms of value)
Available since 1978
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5. Federal Procurement Data System—Next Generation
All federal procurement contracts above the micropurchase threshold
($2,500; before 2004: $25,000)
I More than 98% of all federal procurement actions (in terms of value)
Available since 1978
Detailed information on various contract characteristics:
I Contract value (action obligations and de-obligations)
I Award and completion dates
I Place of performance
I Whether or not a contract is primarily for R&D
I NAICS-classified industry to which a contract can be assigned
I Awarding ministry
I Company-level information
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6. Federal Procurement Data System—Next Generation
All federal procurement contracts above the micropurchase threshold
($2,500; before 2004: $25,000)
I More than 98% of all federal procurement actions (in terms of value)
Available since 1978
Detailed information on various contract characteristics:
I Contract value (action obligations and de-obligations)
I Award and completion dates
I Place of performance
I Whether or not a contract is primarily for R&D
I NAICS-classified industry to which a contract can be assigned
I Awarding ministry
I Company-level information
Procurements by non-federal public entities are not included in the
data
3 of 22 Wiederhold Innovation impact of procurement in the US

7. Total Procurement
3
2.5
2
1.5
1
%
400
300
200
100
0
Billion $, real
1982 1986 1990 1994 1998 2002 2006 2010
Year
Absolute value (left axis) % GDP (right axis)
Source: FPDS−NG, BEA
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8. Total vs. R&D Procurement
0 100 200 300 400
Billion $, real
1982 1986 1990 1994 1998 2002 2006 2010
Year
Total procurement R&D procurement
Source: FPDS−NG
R&D procurement: Firms conduct R&D by the order of the
government
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9. Total vs. High-Tech Procurement
0 100 200 300 400
Billion $, real
1982 1986 1990 1994 1998 2002 2006 2010
Year
Total procurement Procurement in high−tech industries
Source: FPDS−NG
High-Tech Procurement: Procurement contracts for high-tech goods
and services (e.g., biotechnology, aerospace, telecommunication)
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10. Total vs. Defense Procurement
0 100 200 300 400
Billion $, real
1982 1986 1990 1994 1998 2002 2006 2010
Year
Total procurement DoD procurement
Source: FPDS−NG
Defense Procurement: Procurement contracts awarded by the
Department of Defense
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11. Share Competitive Procurement
70%
60%
50%
40%
1982 1986 1990 1994 1998 2002 2006 2010
Year
Source: FPDS−NG
Competitive Procurement: Procurement contracts awarded in a
competition
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12. Motivation

13. Motivation
Public procurement as an innovation policy tool
I EU: Lisbon Strategy (Edler and Georghiou, 2007)
I Germany: High-Tech Strategy (Meyer-Krahmer, 2007)
I Demand-side policies outside Europe in Australia, Brazil, China, and
South Korea (OECD, 2011)
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14. Motivation
Public procurement as an innovation policy tool
I EU: Lisbon Strategy (Edler and Georghiou, 2007)
I Germany: High-Tech Strategy (Meyer-Krahmer, 2007)
I Demand-side policies outside Europe in Australia, Brazil, China, and
South Korea (OECD, 2011)
In previous econometric studies on the innovation effects of
government demand...
I ...procurement spending was either not observable (Aschhoff and
Sofka, 2009), or
I ...only a specific sub-sample of awarding authorities (Draca, 2012) or
contractors (Lichtenberg, 1988) was considered
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15. Motivation
Public procurement as an innovation policy tool
I EU: Lisbon Strategy (Edler and Georghiou, 2007)
I Germany: High-Tech Strategy (Meyer-Krahmer, 2007)
I Demand-side policies outside Europe in Australia, Brazil, China, and
South Korea (OECD, 2011)
In previous econometric studies on the innovation effects of
government demand...
I ...procurement spending was either not observable (Aschhoff and
Sofka, 2009), or
I ...only a specific sub-sample of awarding authorities (Draca, 2012) or
contractors (Lichtenberg, 1988) was considered
Types of products and services purchased by the government were not
addressed, but there is evidence that:
I Public demand is unevenly distributed across industries (Nekarda and
Ramey, 2011)
I Government is an important customer of technologically advanced
products (Cozzi and Impullitti, 2010)
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16. Technological Intensity of Public Procurement
Hart (1998, p. 1):
“[Public] R&D spending was typically accompanied by other measures
that deserve at least as much credit for their technological payoffs. For
instance, the Department of Defense (DOD) not only funded much of
the physical science and engineering R&D that led to advances in
semiconductors and computers, it also purchased a large fraction of
products themselves, especially the most advanced products. The DOD
guaranteed that a market for electronics would exist, inducing private
investment on a scale that would not have otherwise followed even the
most promising research results.”
11 of 22 Wiederhold Innovation impact of procurement in the US

17. Technological Intensity of Public Procurement
Hart (1998, p. 1):
“[Public] R&D spending was typically accompanied by other measures
that deserve at least as much credit for their technological payoffs. For
instance, the Department of Defense (DOD) not only funded much of
the physical science and engineering R&D that led to advances in
semiconductors and computers, it also purchased a large fraction of
products themselves, especially the most advanced products. The DOD
guaranteed that a market for electronics would exist, inducing private
investment on a scale that would not have otherwise followed even the
most promising research results.”
Shifts in the composition of government spending toward
innovation-intensive goods may stimulate private R&D
11 of 22 Wiederhold Innovation impact of procurement in the US

18. Technological Intensity of Public Procurement
Hart (1998, p. 1):
“[Public] R&D spending was typically accompanied by other measures
that deserve at least as much credit for their technological payoffs. For
instance, the Department of Defense (DOD) not only funded much of
the physical science and engineering R&D that led to advances in
semiconductors and computers, it also purchased a large fraction of
products themselves, especially the most advanced products. The DOD
guaranteed that a market for electronics would exist, inducing private
investment on a scale that would not have otherwise followed even the
most promising research results.”
Shifts in the composition of government spending toward
innovation-intensive goods may stimulate private R&D
Empirical approximation of the technological content of procurement:
High-Tech Share
I Procurement in high-tech industries as a share of total procurement in
the private sector
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19. Data

20. Data
Empirical analysis at the level of the US states in the period
1999–2009
13 of 22 Wiederhold Innovation impact of procurement in the US

21. Data
Empirical analysis at the level of the US states in the period
1999–2009
Public procurement
I Data source: Federal Procurement Data System—Next Generation
I About 21.5 million individual contracts, aggregated to the state level
I Only non-R&D contracts with private-sector firms considered to
construct the procurement high-tech share
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22. Data
Empirical analysis at the level of the US states in the period
1999–2009
Public procurement
I Data source: Federal Procurement Data System—Next Generation
I About 21.5 million individual contracts, aggregated to the state level
I Only non-R&D contracts with private-sector firms considered to
construct the procurement high-tech share
Privately funded company R&D expenditures
I Data source: National Science Foundation R&D Survey
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23. Results

24. Pooled Cross Section
2 4 6 8 10
Company R&D (log)
0 1 2 3 4 5
High−tech share (log, t−1)
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25. Regression Results
Dependent Variable:
Company R&D (log)
(1) (2) (3) (4)
High-Tech Share (log, t-1) 0.092
(0.040)
Total Procurement (log, t-1) -0.021
(0.048)
Non-RD Procurement (log, t-1) -0.017
(0.048)
RD Procurement (log, t-1) -0.011
(0.038)
Total Market Size Yes Yes Yes Yes
State Fixed Effects Yes Yes Yes Yes
Time Fixed Effects Yes Yes Yes Yes
Observations 514 514 514 514
R-squared (within state) 0.155 0.137 0.135 0.132
F-statistic 10.050 6.810 6.850 7.250
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Notes: Standard errors (in parentheses) clustered by state. Significance levels: * p0.10, ** p0.05, *** p0.01.

26. Regression Results
Dependent Variable:
Company RD (log)
(1) (2) (3) (4)
High-Tech Share (log, t-1) 0.092
(0.040)
Total Procurement (log, t-1) -0.021
(0.048)
Non-RD Procurement (log, t-1) -0.017
(0.048)
RD Procurement (log, t-1) -0.011
(0.038)
Total Market Size Yes Yes Yes Yes
State Fixed Effects Yes Yes Yes Yes
Time Fixed Effects Yes Yes Yes Yes
Observations 514 514 514 514
R-squared (within state) 0.155 0.137 0.135 0.132
F-statistic 10.050 6.810 6.850 7.250
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Notes: Standard errors (in parentheses) clustered by state. Significance levels: * p0.10, ** p0.05, *** p0.01.

27. Regression Results
Dependent Variable:
Company RD (log)
(1) (2) (3) (4)
High-Tech Share (log, t-1) 0.092
(0.040)
Total Procurement (log, t-1) -0.021
(0.048)
Non-RD Procurement (log, t-1) -0.017
(0.048)
RD Procurement (log, t-1) -0.011
(0.038)
Total Market Size Yes Yes Yes Yes
State Fixed Effects Yes Yes Yes Yes
Time Fixed Effects Yes Yes Yes Yes
Observations 514 514 514 514
R-squared (within state) 0.155 0.137 0.135 0.132
F-statistic 10.050 6.810 6.850 7.250
18 of 22 Wiederhold Innovation impact of procurement in the US
Notes: Standard errors (in parentheses) clustered by state. Significance levels: * p0.10, ** p0.05, *** p0.01.

28. Regression Results
Dependent Variable:
Company RD (log)
(1) (2) (3) (4)
High-Tech Share (log, t-1) 0.092
(0.040)
Total Procurement (log, t-1) -0.021
(0.048)
Non-RD Procurement (log, t-1) -0.017
(0.048)
RD Procurement (log, t-1) -0.011
(0.038)
Total Market Size Yes Yes Yes Yes
State Fixed Effects Yes Yes Yes Yes
Time Fixed Effects Yes Yes Yes Yes
Observations 514 514 514 514
R-squared (within state) 0.155 0.137 0.135 0.132
F-statistic 10.050 6.810 6.850 7.250
19 of 22 Wiederhold Innovation impact of procurement in the US
Notes: Standard errors (in parentheses) clustered by state. Significance levels: * p0.10, ** p0.05, *** p0.01.

29. Conclusions

30. Conclusions
Main results
I Private-sector RD employment is responsive to shifts in the
technological content of public procurement
I Government purchases as a de facto innovation policy tool
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31. Conclusions
Main results
I Private-sector RD employment is responsive to shifts in the
technological content of public procurement
I Government purchases as a de facto innovation policy tool
Policy implications
I Policymakers should not be agnostic about the inter-industry
composition of their purchases
I Not only through support programs (e.g., RD grants, tax credits) a
government can influence private-sector innovation activities
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32. Conclusions
Main results
I Private-sector RD employment is responsive to shifts in the
technological content of public procurement
I Government purchases as a de facto innovation policy tool
Policy implications
I Policymakers should not be agnostic about the inter-industry
composition of their purchases
I Not only through support programs (e.g., RD grants, tax credits) a
government can influence private-sector innovation activities
However...
I Pursuing secondary objectives distorts government demand
I No comparison with other innovation policy tools
I Lessons for Europe?
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33. Thank you very much
for your attention!

34. Backups

35. Total Procurement by State
8
6
4
2
0
AL AK AZ AR CA
2
1.5
1
.5
0
10
5
0
1
.5
0
40
30
20
10
0
6
4
2
0
CO CT DE FL GA
10
5
0
.4
.2
0
15
10
5
0
10
5
0
2
1.5
1
.5
0
HI ID IL IN IA
2
1.5
1
.5
0
8
6
4
2
6
4
2
0
1.5
1
.5
0
3
2
1
0
KS KY LA ME MT
6
4
2
0
6
4
2
0
2
1.5
1
.5
0
.5
.4
.3
.2
.1
.8
.6
.4
.2
NE NV NH NJ NM
2
1.5
1
.5
0
1.5
1
.5
0
6
4
2
8
6
4
2
10
8
6
4
2
NY NC ND OH OK
4
3
2
1
0
.5
.4
.3
.2
.1
2 3 4 5 6
2
0
1.5
1
.5
0
OR MD MA MI MN
15
10
5
0
10
8
6
4
2
6
4
2
0
2.5
2
1.5
1
.5
6
4
2
0
MS MO PA RI SC
10
8
6
4
2
15
10
5
0
1.5
1
.5
0
6
4
2
0
.5
0
SD TN TX UT VT
6
4
2
0
50
0
6
4
2
0
.6
.4
.2
0
40
30
20
10
0
VA WA WV WI WY
8
6
4
2
1
.5
0
4
3
2
1
0
.3
.2
.1
0
1982 1986 1990 1994 1998 2002 2006 2010 1982 1986 1990 1994 1998 2002 2006 2010 1982 1986 1990 1994 1998 2002 2006 2010 1982 1986 1990 1994 1998 2002 2006 2010 1982 1986 1990 1994 1998 2002 2006 2010
Source: FPDS−NG
Billion $, real

36. Procurement and Company-Sponsored RD
100 150 200 250 300 350
Billion $, real
2000 2005 2010
Year
Total procurement Company RD
Source: FPDS−NG, NSF

37. High-Tech Industries (BLS, 2005)
4-digit NAICS code NAICS title
3254 Pharmaceutical and medicine manufacturing
3341 Computer and peripheral equipment manufacturing
3342 Communications equipment manufacturing
3344 Semiconductor and other electronic component manufacturing
3345 Navigational, measuring, electromedical, and control instruments manufacturing
3364 Aerospace product and parts manufacturing
5512 Software publishers
5161 Internet publishing and broadcasting
5179 Other telecommunications
5181 Internet service providers and Web search portals
5182 Data processing, hosting, and related services
5413 Architectural, engineering, and related services
5415 Computer systems design and related services
5417 Scientific research-and-development services

38. Empirical Strategy
Main theoretical result
I Increase in the technological content of public demand stimulates
private-sector RD at the aggregate level through a market-size effect
Estimation equation
logRDi t =

39. 1 logHIGH−TECH−SHAREi t−1
+

40. 2 logMARKET−SIZEi t−1+X
0
i t−1
+i+t+ui t,
RD : Company RD expenditures
HIGH−TECH−SHARE : Procurement high-tech/procurement total
MARKET−SIZE : Total market size
X : Further controls
: State fixed effects
: Time fixed effects
u : Error term

41. Descriptive Statistics
Mean Std. Dev. Min Max
Privately funded RD expenditures (billions $2000) 3.710 6.623 0.019 49.661
Federal non-RD procurement in high-tech industries (billions $2000) 1.662 2.822 0.003 17.708
Federal non-RD procurement in all other industries (billions $2000) 2.309 2.890 0.042 25.894
High-tech procurement share (%) 32.944 19.930 1.520 84.563
GDP (billions $2000) 212.649 254.943 16.714 1,593.577
Population (millions) 5.852 6.425 0.492 36.962
Notes: This table shows the descriptive statistics for the main variables used in the empirical analysis for 50 US states in the
period 1999–2009. The number of observations on privately funded RD expenditures is 514; 36 observations are missing
because of disclosure limitations. All other figures are based on 550 observations. High-tech procurement share is federal
non-RD procurement in high-tech industries as a share of total federal non-RD procurement in the private sector. All
monetary values are expressed in constant dollars with the base year 2000.

42. Robustness
Potential spurious correlation between the procurement high-tech
share and private-sector RD
I Detailed industry-level GDP
Further controls
I RD procurement
I RD subsidies
I Firms’ lobbying spending
Measurement of the variables
I Procurement: Net procurement values (gross value less deobligations)
to construct the procurement high-tech share
Different outcome variables
I RD intensity
I RD employment
Instrumental variable estimation