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Government Technology Procurement and Innovation Theory

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Government Technology Procurement and Innovation Theory Innovation Systems and European Integration (ISE) A research project funded by the Targeted Socio-Economic Research (TSER) program of the European Commission (DG XII) under the Fourth Framework Program, European Commission (Contract no. SOE1-CT95-1004, DG XII SOLS), coordinated by Professor Charles Edquist of the Systems of Innovation Research Program (SIRP) at Linköping University (Sweden). Sub-Project 3.2.2: Public Technology Procurement as a Policy Instrument Government Technology Procurement and Innovation Theory Submitted to the Commission : March, 1998 Charles Edquist Leif Hommen Department of Technology and Social Change, Linköping University S-581 83 Linköping, Sweden TEL:+ 46-(0)13-282260 FAX:+46-(0)13-284461 E-mail:[email protected] Abstract: The paper deals with public technology procurement as an instrument for innovation and industrial policy. It relates public technology procurement to various innovation theories, concentrating on those contributing to the development of a user-producer interaction perspective on public technology procurement. This perspective is utilized to identify and discuss past problems and future prospects of public technology procurement, at a national as well as a European (EU) level. The concern with developing policy implications is reflected throughout the paper. A number of different national ‘models’ of public technology procurement are compared and contrasted, and the political and institutional problems associated with public technology procurement are explicitly and critically discussed. The EC procurement rules are also discussed in relation to the theory and practice of public technology procurement, in both the main text and a lengthy appendix. The section devoted to policy implications focuses on the EU level. The paper also serves to provide a theoretical and conceptual framework and methological guidlines for the conduct of the empirical case studies of public technology procurement which were carried out in the second phase of the ISE sub-project on public technology procurement as a policy instrument. Accordingly, certain sections are devoted to the development of relevant analytical categories -- such as, for example, identification of the stages in a process of public technology procurement. The paper begins by defining public technology procurement and discussing its relation, as one of the few ‘demand side’ instruments, to other instruments of innovation policy, which are in the majority ‘supply side’ instruments. Subsequently, a classification of various types of public technology procurement is developed. Subsequently, private sector technology procurement is discussed from a ‘demand side’ perspective, which is then applied to public technology procurement. This discussion is followed by a discussion of public technology procurement as a special case of user-producer interaction, drawing upon various theories and concepts that have contributed to the Systems of Innovation approach. The concluding parts of the paper are concerned with a developing a critical analysis of the EC procurement rules and with drawing policy implications relevant to both the EU and Member States. Key-words: Case Studies; Comparative Analysis; Demand Side; European Union; Industrial Policy; Innovation Policy; Policy Instruments; Public Technology Procurement; Systems of Innovation; User-Producer Interaction. 2 ! " # $% ! " & ' ! " () " * +!!, $ $ - . ! " ' $ ) ! ' $ $/ 0+ / /- 0+ / $ ' ( 01 ! # $ 2- & $ # " 3 $ 4 $ ' " 5 ) - $$ ' " 6, ! 7 $ ' - " " ") $# ' $(5) " ") $& ' $ " 8 $9 ' $ ) $9 ' $ $) ' ' $ '+") '$ ' ' " 6 7 ' ' " ": '4 ' ! '4 ' $% !) '3 ' ') / 0 /) * ' # ") - * ' # ;" ) ) 6 ") 7 ' # $< $ ' # ' " ) ' ' # 3 ' 4 ! " ;! # ' 4 +" = ""! ") # ' 4 $8 "! ") 3 ' 4 $ ) 3 ' 4 $ $") #* ' 4 $ ')) # ' 4 ' ) 6 7 #$ ' 4 " "! ") # ' 4 / 0 /"! ") # ' 4 $/ 0 /"! ") ## ' 4 # " ) " #4 ' & #3 ! ! " #3 ! )) 4 $ !: "2(! 2 4 ' / / ) ! ) 43 ' 0 8 49 ' $ - ) & ' ' ! " &' ' ,8 &9 ' # -!) 8 3 ) )) 33 # " ! " 9$ 4 ( ; 9 & % ) ! 9& )) 5( ; *$ )) 5< $# ; '4 4 1. Introduction: A Short History of Procurement Government Technology Procurement (GTP) occurs when a government agency places an order for a product or system which does not exist at the time, but which could (probably) be developed within a reasonable period. Additional or new technological development work is required to fulfill the demands of the buyer. This is the 'ideal type' of government technology procurement. In contrast to 'Government Technology Procurement', regular 'Government procurement' occurs where government authorities buy ready made 'simple' products such as pens and papers -- where no R&D is involved. Only price and performance of the (existing) product is taken into consideration when the supplier is selected. No such cases are studied in the ISE procurement sub-project. In capitalist economic systems, where markets are considered to be effective mechanisms for articulating and satisfying most economic needs or demands, the point of departure in the application of government technology procurement must be the satisfaction of genuine social needs -- in other words, specific societal needs unlikely to be met by the market. The products and systems that are developed -- and the 5 technical change that enables their provision -- as the result of government technology procurement must therefore be targeted to solve specific problems. The procurement instrument has been used in the defense material sector in many countries. It has also proved to be an extremely potent instrument for influencing the speed and direction of innovation on the civilian side in some countries -- usually in traditional infrastructure development. In addition, it has served to enhance the competitiveness of those firms successfully meeting the demands and thereby winning the contracts. Procurement was, for example, highly instrumental in the consolidation of some firms of a Swedish origin which are currently large and international. Examples are Ericsson and ABB.1 1.1. National Models of Government Technology Procurement The experience of Sweden and the Nordic countries with Government Technology Procurement has been, on the whole, positive. The Nordic experience has been characterised by informed public purchasing and the exercise of a fairly high level of technological capacity (or 'user competence') on the part of clients during the strategic stages of technical specification and product development. These features of GTP have been credited with playing an important role in the successful development of the telecommunications industry in the Nordic countries (Granstrand and Sigurdson 1985) . The fairly high success rate of Government Technology Procurement in promoting industrial development in the Nordic world has meant that GTP has been widely accepted by the general public, by a large segment of industry, by trade unions and by most political parties. At least in Sweden, the practice has become institutionalized to such an extent that it may be possible to refer to a 'Swedish model' of GTP. A peculiarity of this putative model is the common occurrence of close relationships between government agencies and major firms: "This has, to a large extent, taken the form of long -term intimate collaboration on joint development between large manufacturers and large customers -- a type of industrial relationship for which the new term 'development pair' has been coined" (Fridlund 1993: 4) . This 'Swedish model' of GTP, if it may be termed that, is perhaps an extreme case of a more "generally accepted" historical tendency in Europe for government selection, through the advantage conferred to innovators by the 1 6 concentration of purchases, "to favor the emergence of national champions" (Dalpé 1994) . The 'Swedish model' however, is far from being the "one best way" of Government Technology Procurement. The 'Japanese model' is probably much more well known, though possibly less well understood outside of its country of origin. A key feature of the Japanese approach to GTP is that it relies far less on direct purchasing of new technology than on arranging technology procurement between private economic actors.2 One of the most influential accounts of Japan's economic development from the standpoint of innovation theory has drawn attention to how "The not-so-invisible guiding hand of MITI shaped the long term pattern of stuctural change ... largely ... on the basis of judgements about the future direction of technical change and the relative importance of various technologies" (Freeman 1988: 331) . Analysts working with (explicit) Systems of Innovation perspectives have for some time been interested in the "macro-entrepreneurial role" played by Japan's Ministry of International Trade and Industry (MITI) in "organizing clusters of firms and technologies into development blocs" (Carlsson and Stankiewicz 1995: 43) . However, their investigations have shown that the form of industrial organization promoted by MITI's procurement activities is quite different from that described by the term "development pair", and is far better characterised by the term "network". The 'network' aspects of the Japanese model, together with MITI's unique blend of supply-
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