Effects of government procurement on industrial innovation

Technology In Society, Vol. 16, No. 1, pp. 65-83, 1994 Copyright © 1994 Elsevier Science Ltd Printed in the USA. All fights reserved 0160-791X/94 $6.00 + .00

Pergamon

Effects of Government Procurement on Industrial Innovation Robert Dalpd

A B S T R A C T Several strategies for converting g o v e r n m e n t p r o c u r e m e n t into i n s t r u m e n t s of technology policy are reviewed. By exam i ni ng case studies, the a u t h o r addresses factors t hat explain the role of governm ent procurement in innovation. The most important factors are: the technological capacity of the public sector user, the value o f orders t h a t al l ows the s u p p l i e r to reduce the risk associated with innovation, and the relation between needs a n d requirements. Since p r o c u r e m e n t policy is first a n d foremost a series of p o l i t i c a l decisions concerning government services and the ways to render them, political factors are also considered.

Government Procurement and Innovation

Governments of industrialized countries are major buyers of goods and services. An EEC study 1 estimated that the size of public procurement, including public administration and public enterprises, in percentage of GDP for 1985, was 11.8% for Germany, 13.1% for Italy, 14.1% for France, and 21.8% for the United Kingdom. According to a study of innovation in Canada in the late 70s, 2 the public sector was the primary user of 25% of innovations, the potential user of 13% of patents, and the buyer of 8% of goods manufactured by Canadian industry. The same study shows that the Canadian public sector demand was highly concentrated in four services: defense, public health, electrical utilities, and telephone utilities. It also shows that the public sector's primary use of innovation was relatively h i g h for R&D i n t e n s i v e i n d u s t r i e s , s u c h as a e r o n a u t i c s , t e l e Robert Dalpd is an associate professor of political science at Universitd de Montrdal and a researcher at the Centre interuniversitaire de recherche sur la science et la technologie of the Universitd de Montrdal and the University of Qudbec in Montrdal (CIRST). His fields of interest are government procurement policy and public research evaluation and policy. He has published several science and technology studies and in public policy journals. He has recently coedited a book on Qudbec's innovation policy.

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c o m m u n i c a t i o n s , p h a r m a c e u t i c a l s , a n d scientific i n s t r u m e n t a t i o n . Although there is no estimate of the size of public sector procurement in the United States, the demand share seems to be smaller. 3 It is, however, well known that the United States has one of the world's largest defense sectors, which is an important buyer for several R&D intensive industries. 4 Even if the industries involved vary from one country to another, it a p p e a r s t h a t g o v e r n m e n t s a r e t h e b u y e r s of 10% to 15% of t h e production in industrialized countries. They are also important buyers for several R&D intensive industries, not only for the military but also for civil markets. In this respect, w h e t h e r or not governments develop an explicit p r o c u r e m e n t policy t h a t is o r i e n t e d t o w a r d s innovation, t h e i r de c i si ons c o n c e r n i n g prices, q u a n t i t i e s , a n d s t a n d a r d s affect innovation, positively or negatively, in a group of industries involved in g o v e r n m e n t procurement. S e v e r a l s t r a t e g i e s h a v e b e e n d i s c u s s e d in an a t t e m p t to c o n v e r t government procurement into instruments of innovation policy. One such s t r a t e g y calls for public a d m i n i s t r a t i o n s to c o n t r i b u t e to i n d u s t r i a l d e v e l o p m e n t by p r o m o t i n g innovation t h r o u g h t h e i r m a r k e t power. 5 Sustained by the long-standing a r g u m e n t concerning infant industries, some s t r a t e g i e s r e g a r d public i n s t i t u t i o n s as able to n u r t u r e a n ew e n t e r p r i s e by giving it its first order and allowing it to exploit other public and private markets. 6 It is argued in a more recent theory t h a t by g i v i n g n a t i o n a l i n d u s t r y p r i v i l e g e d a c c e s s to p u b l i c m a r k e t s , governments provide a chance to innovate and gain an advantage over competitors. These strategies are justified by the large size of public sector d e m a n d , the fact t h a t the public d e m a n d is relatively high in R & D - i n t e n s i v e i n d u s t r i e s , w h i c h are d e f i n e d as s t r a t e g i c by m o s t governments, and the role of the demand and the user, which is stressed in innovation theory. The role of g o v e r n m e n t p r o c u r e m e n t in i n n o v a t i o n was a n a l y z e d m o s t l y t h r o u g h case s t u d i e s . In a few s t u d i e s , m e t h o d s h a v e b e e n developed t h a t permit a larger profile to be obtained. 7 And, to date, only a h a n d f u l of s y n t h e s e s have been a t t e m p t e d . 8 R e v i e w i n g t h e s e case studies, I realized t h a t even if they were done by isolated researchers w i t h v a r i o u s i n t e r e s t s , a n d t h i s s e e m s to e x p l a i n t h e l a c k of c o m m u n i c a t i o n b e t w e e n t h e m , t h e i r r e s u l t s w e r e in fact r e l a t i v e l y convergent. I also realized that the studies were performed mostly by researchers concerned with the m a n a g e m e n t of innovation, who based t h e m on a background of innovation theories. Policy dimensions, which we think are essential to u n d e r s t a n d i n g government procurement, were n e g l e c t e d . Policy d i m e n s i o n s a r e i m p o r t a n t for u n d e r s t a n d i n g , for instance, the role of groups and institutions in procurement decisions. My objectives are to review case studies of government procurement to u n d e r s t a n d its role in i n n o v a t i o n , w h i l e e m p h a s i z i n g t h e policy dimension. I will present the incentives and obstacles for new product purchases on public markets.

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An examination of the effectiveness of this sort of public intervention was almost nonexistent in the literature until recently. This void can be explained by the lack of relevant data, such as those on suppliers and bids. 9 Also, t h e costs of i m p l e m e n t i n g such a policy are difficult to establish. P r o c u r e m e n t policy costs are the costs added w h e n a buyer, r a t h e r t h a n selecting the lower price, discriminates amo n g suppliers. But, since most discriminating mechanisms, such as supplier lists and t e c h n i c a l s t a n d a r d s , prohibit unfavored firms from participating, we cannot know their bidding prices. A n o t h e r r e a s o n for t h e l a c k of l i t e r a t u r e on t h i s s u b j e c t is t h a t procurement is a multiobjective policy. On one hand, its role is to provide g o v e r n m e n t services a n d a p p r o p r i a t e goods for those services to be performed, and, on the other hand, it is part of the economic as well as s o c i a l policy, t h e o b j e c t i v e s of w h i c h a r e r e g i o n a l d e v e l o p m e n t , innovation, or minority support. Therefore, it is difficult to list all the objectives pursued and to weigh each one. Recently, in the United States, e x t e n s i v e d i a l o g u e s t o o k p l a c e on t h e e f f e c t i v e n e s s of d e f e n s e p r o c u r e m e n t practices. Some of the resu lts of this l i t e r a t u r e will be presented in the conclusion.

N e w P r o d u c t D e m a n d on P u b l i c M a r k e t s

The role of government procurement in innovation can be analyzed in t e rms of the role of de m a nd, which is considered to be a d e t e r m i n i n g variable of innovation. This type of analysis r e m a i n s theoretical, and only a few researchers have analyzed the actual workings of demand. 10 There is now a general consensus that demand (pull) should be coupled with technology (push). Since innovation results from the synthesis of knowledge developed inh o u s e or o b t a i n e d t h r o u g h v a r i o u s diffusion m e c h a n i s m s , access to information or technologies available from clients and suppliers is an i m p o r t a n t aspect of the diffusion network, p a r t i c u l a r l y in i n d u s t r i e s produc i ng complex goods. 11 The role of the client is crucial at every s t a g e , from d e v e l o p m e n t to c o m m e r c i a l i z a t i o n , since c l i e n t n e e d s stimulate innovation, such as when new equipment requirements lead to adjustments in the products offered. P. Gardiner and R. Rothwel112 have demonstrated t h a t clients with clear constraints in terms of design force their suppliers to innovate and improve their products. In more general terms, success in innovation directly depends on client reaction: Knowledge of a client's needs is essential, and a supplier with privileged access to a customer stands a better chance of innovating. 13 I n d u s t r i e s l i n k e d to b u y e r s h a v i n g proficiency in th e use of a given product often benefit from innovative ideas and information as well as from development support. 14 In this way, public m a r k e t s contribute to

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t e c h n o l o g i c a l d e v e l o p m e n t w h e n t h e y become th e first b u y e r of an innovation or an improved product. A buyer's role in the purchase of capital goods is obviously greater t h a n in t h a t of consumer goods. 15 When products are aimed at individuals, the latter have no means of making their needs known and demanding products b e t t e r a t t u n e d to t he i r r e q u i r e m e n t s . In the case of capital goods, clients h a v e specific r e q u i r e m e n t s , and can provide t e c h n i c a l support for innovation. A customer's role can go as far as prototype development, which is then passed on to another industry for production. E. Von Hippe116 has shown, for instance, t h a t in the case of scientific equipment, the vast majority of innovations are developed by the user. A customer can also provide feedback on how production evolves in an industry. The first buyer, therefore, plays a strategic role, assuming the risks inherent to the first order and part of the costs of fine-tuning the product. 17 Innovation in capital goods is made easier when industry has ties with a client who also innovates and has a certain technological capacity. 18 In the framework of government demand, it is convenient to examine, in terms of the user's role in the innovation process and in terms of the user's expressed needs, which of its characteristics explain the demand for new products. The public sector shares certain characteristics with p r i v a t e - s e c t o r b u y e r s , w h e r e a s o t h e r s a r e m o r e t y p i c a l of t h e government sector. Users with a g r e a t e r technological capacity are those t h a t can c o n t r i b u t e t he most to a supplier's innovation. The first factor t h a t d i s t i n g u i s h e s g o v e r n m e n t organizations t h a t buy n ew products from those t h a t purchase standardized goods is their technological capacity. A buyer t h a t is an innovator in its own right appears to be a necessary c o n d i t i o n f a c i l i t a t i n g i n n o v a t i o n on t h e p a r t of t h e s u p p l i e r . This p r e s u p p o s e s a positive r e l a t i o n s h i p b e t w e e n a u s e r ' s t e c h n o l o g i c a l capacity and its d e m a n d for new high-performance products. K. Pavitt, 19 in a s t u d y c o v e r i n g b o t h t h e p r i v a t e a n d p u b l i c s e c t o r s , h a s d e m o n s t r a t e d t h a t users' innovation activities have forced suppliers to innovate in order to keep up with technological developments. The question at this stage is w he t h er a client will be satisfied with a standardized product, or take the risks inherent to the purchase of a new product, even if it is only at the prototype stage or earlier. A client's tendency to purchase new products, and chances of success, depend to a great extent on t h a t client's technical expertise. Furthermore, mastering b a s i c t e c h n o l o g y is i m p e r a t i v e for t h e o p e r a t i o n of c o m p l e x a n d sophisticated equipment. A government's research effort is also strategic because it improves the possibility of transferring technology to industry. Suppliers, therefore, have an advantage in dealing with public clients h a v i n g a high degree of technological capacity, particularly when the development of a new generation of technology is at stake. Technology t r a n s f e r based on a user's in-house research and development (R&D)

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activities has a positive impact on a supplier's technological capability a n d t e c h n i c a l e x p e r t i s e . By b e i n g t h e l e a d u s e r in c e r t a i n v e r y i n n o v a t i v e i n d u s t r i e s , t h e p u b l i c s e c t o r is t h e f i r s t u s e r of m a n y innovations in a small group of industries. In other words, government has the power to structure these industries because of the quantities it p u r c h a s e s , as w e l l as t h e s p e c i f i c a t i o n s a n d p r i c e s it i m p o s e s . F u r t h e r m o r e , g o v e r n m e n t , to a c e rtain extent, molds th e d e m a n d of o t h e r users. B e c o m i n g t he s u p p l i e r of a very i n n o v a t i v e client t h u s c o n s t i t u t e s a c l e a r a d v a n t a g e , since o t h e r b u y e r s will often place additional orders for the same products. One can therefore expect that a supplier with technological leadership in a particular industry will serve the m a r k e t of a technologically leading buyer. A n u m b e r of s t u d i e s h a v e f o c u s e d on t h e r e l a t i o n s h i p b e t w e e n government expertise and innovation among suppliers. A study on the role of public purchasing in the development of the telecommunications i n d u s t r y in Nordic c o u n t r i e s has e m p h a s i z e d th e i m p o r t a n c e of the c l i e n t ' s t e c h n o l o g i c a l c a p a c i t y in t h e s t r a t e g i c s t a g e s of t e c h n i c a l specification and product development. 20 The authors have pointed out t h a t the clients with the highest technological capacity have had the most impact on suppliers' innovation. In Canada, g o v e r n m e n t buyers most active in R&D fields such as energy, telecommunications, health, and defense are the first users of innovations to a greater extent t h a n in o t h e r sectors. 21 F. R. L i c h t e n b e r g 22 has d e m o n s t r a t e d t h a t specific American defense procurement contracts have resulted in an increase of R&D s p e n d i n g at the firm level, especially in the area of design and technical competitions, which are the first steps in the procurement of major equipment. The role of government procurement in innovation is most influential at the earliest stages of the life cycle of a product and of an industry. According to R. Hebert and R. Hoar, 23 an important factor t h a t explains t he role of p r o c u r e m e n t policies in innovation is the m a t u r i t y of the product and of the industry. In the early stages of development, when p r o d u c t s a re not ye t s t a n d a r d i z e d , public sector d e m a n d can affect i m p o r t a n t technical changes. In the later stages, the i n d u s t r y is less receptive to clients' demands. Following W. B. Arthur's 24 reasoning, we can state t h a t decisions made by buyers in the public sector could be among the events t h a t determine the evolution of standards. A g o v e r n m e n t is most i n f l u e n t i a l w h e n it is itself th e end u s e r of innovation. Another recurring variable t h a t arises from studies focusing on governments as users of innovations is t h a t their technical standards are a determining factor, especially when they correspond to the actual needs of the user. 25 Innovation is facilitated w h e n r e q u i r e m e n t s meet real needs because users are involved in the innovation process and can offer technical support. This, of course, is only possible if a user has some degree of technical expertise in relation to the product purchased. Also, w h e n requirements are directly in line with needs, an innovator has a

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better chance of finding other markets for its product in similar services in the private or the public sectors, and, if the requirements correspond with their actual needs, users will be in a better position to evaluate the various products and to choose the most adequate technologies. As is t h e case w i t h a u s e r ' s t e c h n o l o g i c a l capability, t h e r e l a t i o n b e t w e e n n e e d s a n d r e q u i r e m e n t s u n d e r l i e s a u s e r ' s c e n t r a l role in i n n o v a t i o n . S t a n d a r d s m u s t be d e f i n e d by t h e u s e r a n d n o t by a centralized administration not directly involved in their implementation, especially if it does not possess the relevant information. Our analysis therefore has direct implications for innovation policies. First, users in t h e p u b l i c s e c t o r s h o u l d c o m m u n i c a t e t h e i r n e e d s in t e r m s of p e r f o r m a n c e r a t h e r t h a n t h r o u g h s t a n d a r d s or t r a d e m a r k s . And, in order to stimulate innovation, requirements should be set by users and not by a c e n t r a l a g e n c y t h a t is not closely r e l a t e d to u s e r s ' needs. However, a tendency by end users to buy products t h a t are too complex and too costly would require intervention by a central agency. 26 Government procurement is most effective when it corresponds to the c o m m e r c i a l m a r k e t s t r a t e g i e s of the suppliers. This factor was also stressed by R. Hebert and R. Hoar. 27 According to researchers who have studied government intervention in technological development through purchases, their potential to stimulate innovation stems from the way this me a sure directly affects the industry's market. 28 Through decisions t h e y m a k e as clients, g o v e r n m e n t s have a direct impact on i n d u s t r y m a r k e t size and, eventually, on profits. When government buyers ask for h i g h - p e r f o r m a n c e p r o d u c t s , a s u p p l i e r c a p a b l e of m e e t i n g t h e s e r e q u i r e m e n t s moves into a position of increased m a r k e t share. Public sector procurement policies can also positively affect suppliers' strategies if it reduces risk. In this respect, industry cannot be responsive to procurement policies if other factors hinder innovation. 29 For instance, in the procurement of new complex goods, suppliers will participate only if they assume that the level of risk is not too high and if they can obtain future contracts. A public m a r k e t of a certain size is a necessary incentive for industry. A m a r k e t c o n s t i t u t e s an i n c e n t i v e for i n n o v a t i o n if o r d e r s r e a c h a m i n i m u m value and allow a company to offset research costs and reduce risks. In this situation, a company will find it worthwhile to satisfy the user's requirements by developing a new product. Innovation risks are reduced if the firm is g u a r a n t e e d an initial m a r k e t and if its innovation can s e c u r e an a d v a n t a g e in follow-up c o n t r a c t s . In th e case of th e d e v e l o p m e n t of a n e w g e n e r a t i o n of technology, sellers will consider participating in initial orders even if the contract value is low, with the h o p e of g e t t i n g in on t h e g r o u n d floor a n d h o l d i n g a n o p t i o n on subsequent purchases. The m i n i m u m value varies according to the firm and the industry. Case studies have underscored the importance of the concentration of orders in g u a r a n t e e i n g suppliers a sufficient market. 30 The increased

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value of orders is often assured by a greater concentration of demand. In addition to increasing the value of orders and d e t e r m i n i n g price and product characteristics, concentration can increase the buyer's technical expertise, as compared to a situation in which several small isolated buyers share the market. The role of demand concentration in industrial innovation is far from being a settled matter. 31 Studies dealing with a client's capacity to influence its suppliers, particularly in establishing price and quantities, have concluded that demand-side concentration is a necessary condition. 32 In fact, clients in oligopsonistic or monopsonistic s i t u a t i o n s can influence t h e i r suppliers as long as t h e i r d e m a n d is sufficient to force suppliers to respond to their requirements. 33 The g o v e r n m e n t buyer is seldom in a monopsonistic position in the n a t i o n a l m a r k e t . The f o r m a t i o n of p u b l i c s e r v i c e m o n o p o l i e s by g o v e r n m e n t s for m i l i t a r y a n d political r e a s o n s in d e f e n s e a n d for socioeconomic reasons in transportation, communication, and energy h a v e r e s u l t e d in a c o n c e n t r a t i o n of d e m a n d . Also, e c o n o m i c considerations, such as economies of scale, frequently tend to favor the concentration of orders on a single supplier as an industrial focal point. At times, concentration is also intensified by government procurement practices that tend to group various resources into larger orders. As a result, a government's capacity to influence its suppliers is greater when it purchases a significant share of the industry's sales. In other words, the buyer's capability to get suppliers to satisfy its requirements depends on its market power. Governments initially express needs that they try to satisfy through an existing market. If no product on the market matches their requirements, they may encourage suppliers to innovate and, using their monopsonistic position, induce them to develop new products. It is well k n o w n t h a t the American defense program has played a major role in the development of several industries. 34 Several positive factors, such as t h e t e c h n o l o g i c a l c a p a b i l i t y of t h e user, d e m a n d concentration, and very large orders, played a role in this development. In t h e case of a e r o n a u t i c s , n e w e q u i p m e n t d e v e l o p e d for d e f e n s e purposes was later adapted to the civilian markets. 35 The rise of the semiconductor industry also started because of defense contracting.36 In this case, American defense represented the sole client for the industry during the early years. The lag in the European semiconductor industry d u r i n g t h e 1960s has b e e n e x p l a i n e d by the low level of t e c h n i c a l requirements in the civilian market. American companies, on the other hand, had to innovate in order to satisfy the specifications imposed by the public sector market. 37 In the American computer industry, defense still wields a great deal of influence through its demand for leading highp e r f o r m a n c e e q u i p m e n t . 38 New g e n e r a t i o n s of c o m p u t e r s are still developed for government clients, and, as production costs drop, they are spun off to wider markets. O u r own r e s e a r c h h a s , h o w e v e r , led us to t h e c o n c l u s i o n t h a t concentration does not always facilitate innovation. 39 A client must have

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s o m e d e g r e e of t e c h n i c a l e x p e r t i s e , r a t h e r t h a n act as a s i m p l e acquisitions bureau for several small and isolated government clients. Concentration facilitates innovation when it allows competent users to have direct contact with suppliers. Also, demand-side concentration has forced fusions among suppliers who develop market power comparable to that of the buyer, thus reinforcing their position in the market through political leverage. As a result, they become less inclined to innovate. The fact t h a t considerations other t h a n technology and quality of products are often involved in procurement decision reduces the impact of p r o c u r e m e n t policies for innovation. P r o c u r e m e n t decisions in the public sector result from a variety of economic as well as political and institutional factors. For instance, it is well known t h a t the regional d i s t r i b u t i o n of orders has an electoral impact. The most i m p o r t a n t n o n e c o n o m i c factors in p r o c u r e m e n t decision m a k i n g are n a t i o n a l security and electoral support. These objectives, particularly national security, occasionally relegate cost considerations to a secondary role in decisions c o n c e r n i n g g o v e r n m e n t p r o c u r e m e n t of h i g h - p e r f o r m a n c e products. In such instances, performance-oriented procurement tends to favor innovation. The defense i n d u s t r y is a typical example of this dynamic. In the interest of national security, product performance rather than price is the primary selection criterion. Governments are prepared to pay more in r e t u r n for sophisticated and reliable high-precision armaments. In this scenario, innovation and product improvement constitute a condition for market entry. For some purchases, price varies according to product performance. For example, in the case of INTELSAT satellites, price conditions linked to performance indicators such as initial failure and design life can fluctuate between 17% and 43% of the contract. 40 This dynamic also comes into play, although to a lesser extent, in other sectors such as health, in which product performance is also essential. Managers of government-controlled utilities tend to focus on quality and p r o d u c t p e r f o r m a n c e in o r d e r to s a t i s f y s o c i o e c o n o m i c goals. M e g a p r o j e c t s o f t e n give rise to t h e d e v e l o p m e n t of n e w p r o d u c t g e n e r a t i o n s . 41 The d e v e l o p m e n t s in n u c l e a r t e c h n o l o g y in several industrialized countries during the 1970s in response to energy demand serve as an illustration of this type of dynamic. Governments are major users of new products when technology is the primary criterion for purchases. However, given the political nature of s t a t e i n t e r v e n t i o n , o t h e r c o n s i d e r a t i o n s can t a k e p r i o r i t y over technology. The objectives of various government agents are not always best s e r v e d by the p r o c u r e m e n t of new products. P r o c u r e m e n t has important implications on both political and industrial levels. At the industrial level, several studies have demonstrated the impact of g o v e r n m e n t purchases on some aspects of the industrial structure: international trade, 42 multinationals, 43 concentration, 44 and regional distribution of economic activity. 45 For example, defense spending can

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have an impact on regional development, so various regions will use t h e i r p o l i t i c a l w e i g h t to lobby for d e f e n s e c o n t r a c t s . 46 T h r o u g h p u r c h a s i n g , g o v e r n m e n t s have, in fact, the power to d e t e r m i n e th eir suppliers' m a r k e t shares. Thus, innovation becomes a major stake in the competition for contracts, since the winning firm inherits a competitive advantage and privileged access to future orders. In industries in which it is the sole or lead user, a government holds leverage over its suppliers. Nevertheless, private firms can counterbalance this power through the use of political lobbying, given the wide economic impact of large orders, especially on regional development. In the United States, state intervention is generally more accepted in t h e d e f e n s e i n d u s t r y t h a n in civilian sectors, in w h ich g o v e r n m e n t support may allow a competitor to gain the upper hand in the innovation process through m a r k e t guarantees. The concentration of purchases tends to favor the emergence of national champions, the object of a continuous struggle between suppliers. This selection process, generally accepted in E u r o p e a n industry, is contested in the North American private sector. Since a contract is the first phase in the development of a new technology a nd t he stakes are high for suppliers, they m a y call for g o v e r n m e n t i n t e r v e n t i o n to m a i n t a i n t h e i r a d v a n t a g e in the public m a r k e t . Less competitive and innovative firms tend to focus competition on the political impact of their activities r a t h e r t h a n on technological development. In this sense, procurement policies constitute a form of protection for less dynamic firms r a t h e r t h a n an instrument for innovation. At the political level, since 15% to 20% of g o v e r n m e n t budgets are allocated to purchases, which represent close to 15% of national output, p r o c u r e m e n t b e c o m e s a s t r a t e g i c m e c h a n i s m of g o v e r n m e n t i n t e r v e n t i o n . V a r i o u s a g e n t s will, t h e r e f o r e , t r y to i n f l u e n c e t h e procurement process according to their particular interests. As a result, the choice of objectives becomes the main issue of negotiation among politicians, civil servants, and industrialists. 47 In Italy, for example, firms active in g o v e r n m e n t p r o c u r e m e n t have traditionally benefitted from a g u a r a n t e e d share of the market. 48 A noneconomic factor that plays an important role in all of this is voter support. Elected officials attempt to maximize electoral support through p r o c u r e m e n t decisions. Most science and technology decisions do not receive m u c h public attention, unless, as stressed by L. Cohen and R. G. Nol149, a scandal surrounds them or they are related to the state of the nation. However, among the types of science and technology decisions t h a t are made, procurement decisions are probably the most publicized. The implication is t h a t this objective shapes p r o c u r e m e n t decisions, particularly on three characteristics of public sector demand. 50 First, elected officials tend to avoid risk. The electoral cost of a failure a p p e a r s too high for elected officials; hence, t h e y prefer to invest in projects t h a t have a high probability of success. In this respect, elected officials will not favor very innovative and risky procurement projects.

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E v e n if this is t r u e for most p r o c u r e m e n t decisions, elected officials occasionally support very risky projects. The benefits of these projects are visibility and potential contribution to national prestige. 51 Almost every U n i t e d States president has developed such projects, which are closely associated to t he i r image. The same can be said for leaders of other countries. Second, elected officials are seeking relatively short-term benefits: The results must be seen before the next election. Therefore, less risky and short-term projects are favored. From our own research, we observed t h a t the electoral benefits are expected in a m a t t e r of a few months, since voters' decisions are based on a few important recent events. T h i r d , e l e c t e d officials a r e a w a r e of t h e d i s t r i b u t i o n a l i m p a c t of p r o c u r e m e n t d e c i s i o n s . T h e y p r e f e r d e c i s i o n s t h a t h a v e no c l e a r distributional impact. For instance, w h e n projects are performed in a specific city or region, the number of votes they can win in this particular area is perceived as being much smaller than those votes lost in regions not selected. Elected officials will prefer to share contracts among potential suppliers, if no technical considerations force concentration of orders. The conclusion t h a t can be d r a w n from this is t h a t elected officials tend to be reluctant to make procurement decisions, which, according to innovation theory, could favor innovation. They will probably be opposed to very risky projects due to the political costs of potential failure. If a higher concentration of orders can be justified in the innovation theory, these officials will be aware of its distributional impact. W h e n e l e c t e d officials s u p p o r t r isk y projects t h a t involve a h i g h concentration of orders, they often face strong political obstacles, which s h a p e t h e p r o j e c t a n d l i m i t its i m p a c t . A s t u d y of t h e Q u e b e c government's procurement policy for the purchase of microcomputers for the education system illustrates some of the problems of g o v e r n m e n t i n t e r v e n t i o n in an e m e r g i n g industry. 52 H a v i n g as an objective the d e v e l o p m e n t of t h e local m i c r o c o m p u t e r i n d u s t r y , t h e g o v e r n m e n t selected one n a t i o n a l supplier t h a t was supposed to monopolize the whole school market. The awarding of the first contract touched off a conflict between competitors, because it allowed one firm to emerge and e v e n t u a l l y occupy a d o m i n a n t position in th e local m i c r o c o m p u t e r industry. School buyers were opposed to the contract because it limited their political autonomy in relation to the Education Department. Also, the microcomputers developed did not correspond to the needs of the different users because the firm was not capable of offering the same diversity as t h e i r large A m e r i c a n competitors. Due to these political problems, c o m p l a i n t s from excluded suppliers, protests from school administrators, and financial difficulties faced by the small supplier, the program was quickly abandoned. The problem of political intervention can also be linked to the tendency of public m a r k e t suppliers to specialize.

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In g o v e r n m e n t p r o c u r e m e n t s i t uatio n s , a close r e l a t i o n b e t w e e n a public purchaser and a firm tends to develop, and, when the firm becomes the sole supplier, it has little incentive to innovate. In order to get as m a n y social benefits as possible, a firm that has developed a product for a public sector buyer m u s t m a i n t a i n its research activities and find new a p p l i c a t i o n s for its p r o d u c t s . A c o m p a n y m u s t t h e r e f o r e seek n e w g o v e r n m e n t c l i e n t s or f i n d b u y e r s in t h e p r i v a t e m a r k e t . C l i e n t specialization, rather than product specialization, limits transfer possibilities. F i r m s dealing with a limited n u m b e r of clients in public m a r k e t s t e n d to neglect n e w applications for t h e i r products in other markets. In industries serving both public and private sectors, some firms tend to specialize in only one market. 53 This specialization occurs when the two markets have different dynamics and criteria for competition. Government buyers tend to maintain the same suppliers, which results in the establishment of a close relationship between client and supplier. One explanation for this practice is the conformity of technical systems. According to R. Williams and R. Smellie, 54 the initial supplier holds a s t r o n g option on s u b s e q u e n t orders an d on m a i n t e n a n c e a n d p a r t s contracts. It is in the client's best interest to maintain its supply source through regular ordering with the same supplier. This factor is especially relevant w h e n the technical systems do not allow for substitution from other suppliers. Also, since the selection of a new supplier presents a risk, there is a tendency to favor a supplier who has given satisfactory service and with whom the client is familiar. As for the supplier, specialization gives it certain advantages, such as the political leverage to force a client to do business with it because the selection of a n o t h e r supplier could result in a factory closing and a drop in regional employment. 55 France's public sector m a r k e t is an illustration of firm specialization. 56 J. Zysman 57 has shown that in the electronics industry, enterprises have to c h o o s e b e t w e e n p u b l i c or p r i v a t e m a r k e t s . T h i s choice can be e x p l a i n e d by t h e di f f e r e nt d y n a m i c s b e t w e e n th e two m a r k e t s : The competition in private m a r ke t s focuses primarily on quality and price, whereas in the public markets, political leverage is an additional factor. When specialization comes into play, it can have three impacts. First, suppliers often have little incentive to innovate given their guaranteed m a r k e t access. Second, in a bilateral monopoly, both the client and the supplier have a tendency to h a n g on to the same technology in order to avoid innovation risks and adjustment costs. Third, when suppliers are limited to a single client, innovation cannot be fully exploited, given the fact t h a t transfers to other applications are fairly difficult to achieve. In m o s t i n d u s t r i a l i z e d c o u n t r i e s , a l m o s t h a l f of th e p r o c u r e m e n t b u d g e t is a w a r d e d on a sole-source basis. This is e x p l a i n e d by two factors: It could be economically inefficient to m a i n t a i n two or more suppliers, as is the case w h e n complex goods for defense systems are involved, and, considering m a i n t e n a n c e and parts, the initial supplier f r e q u e n t l y h a s a n a d v a n t a g e d u e to t e c h n i c a l s t a n d a r d s . T h e

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i m p l i c a t i o n s o f t h i s p o l i c y on c o n t r a c t p r i c e h a v e b e e n s t u d i e d in A m e r i c a n economic l i t e r a t u r e . T h e a s s u m p t i o n is t h a t firms, w h e n t h e y do n o t h a v e c o m p e t i t o r s , h a v e no incentives to limit costs a n d increase t h e i r p r o d u c t i v i t y . T h e c o n c l u s i o n is t h a t m e c h a n i s m s s h o u l d be i m p l e m e n t e d in o r d e r to i n h i b i t t h e i r inefficient behaviors. If, as we h a v e p r e v i o u s l y c l a i m e d , t h e v a l u e of c o n t r a c t s a n d t h e i r c o n c e n t r a t i o n can c o n s t i t u t e an i n c e n t i v e for s u p p l i e r s to i n n o v a t e , this s h o u l d n o t be e x t e n d e d to t h e e s t a b l i s h m e n t of b i l a t e r a l m o n o p o l i e s . S e v e r a l cases of i n n o v a t i o n in public m a r k e t s h a v e d e m o n s t r a t e d t h a t b o t h clients a n d s u p p l i e r s h a v e h a d o t h e r sources or outlets. 58 E v e n if one s u p p l i e r can fill a m a j o r s h a r e of orders, access to o t h e r s u p p l i e r s is s t r a t e g i c b e c a u s e it c a n c o n t r i b u t e to t h e t e c h n o l o g i c a l c a p a c i t y of t h e user. O n e c a n t h e n s u p p o s e t h a t clients h a v e t h e a d v a n t a g e of b e i n g in a position to a c q u i r e p r o d u c t s from a c o m p e t i t o r of t h e m a i n s u p p l i e r w h e n p e r f o r m a n c e is a factor. W i t h this experience, t h e u s e r could p a s s on to its main supplier knowledge of h i g h e r - p e r f o r m i n g products m a n u f a c t u r e d by its competitors. The lack of coordination among government policies makes p r o c u r e m e n t d i f f i c u l t to u s e s i m u l t a n e o u s l y w i t h o t h e r i n s t r u m e n t s . G o v e r n m e n t s c a n u s e a w i d e r a n g e o f i n c e n t i v e s in a d d i t i o n to p r o c u r e m e n t . All i n n o v a t i o n policy and, m o r e broadly, i n d u s t r i a l policy m e a s u r e s , can a s s i s t a c o m p a n y d u r i n g t h e i n n o v a t i o n process, as well as in t h e p r o d u c t i o n a n d m a r k e t i n g p h a s e s . T h r o u g h p r o c u r e m e n t , governments can guarantee the innovating firm a market, i m p l e m e n t a t i o n of s u b s i d i e s , a n d f i n a n c i n g p r o g r a m s , p o t e n t i a l l y r e d u c i n g t h e risks associated w i t h innovation. Public aid c a n be e i t h e r financial or technical. F i n a n c i a l incentives, be t h e y s u b s i d i e s or fiscal e x e m p t i o n s , r e d u c e i n n o v a t i o n costs a n d risks, a n d t h e i r i m p a c t c a n be m a x i m i z e d by p r o v i d i n g a firm an o p p o r t u n i t y to u n d e r t a k e r e s e a r c h p r o g r a m s t h a t it w o u l d n o t h a v e o t h e r w i s e b e e n able to h a n d l e . In i n d u s t r i a l i z e d c o u n t r i e s , s o m e of t h e i n d u s t r i e s active in public m a r k e t s are in fact a m o n g t h e m o s t h i g h l y subsidized. T h e y are often l i n k e d to t h e d e f e n s e i n d u s t r y , a n d t h e y c a n n o t u n d e r t a k e m a j o r r e s e a r c h p r o g r a m s w i t h o u t g o v e r n m e n t f i n a n c i n g . 59 In C a n a d a , m a j o r s u b s i d i z e d i n d u s t r i e s for R&D are a e r o s p a c e a n d t e l e c o m m u n i c a t i o n s , two industries for which governments are first users of many i n n o v a t i o n s . 60 According to a s t u d y of 65 C a n a d i a n s t a r t - u p c o m p a n i e s in m i c r o e l e c t r o n i c s a n d c o m m u n i c a t i o n s , f i r m s selling p r o d u c t s to t h e public sector are m o r e heavily subsidized t h a n t h o s e doing b u s i n e s s only w i t h t h e p r i v a t e sector. 61 Government intervention also involves technical support. Public l a b o r a t o r i e s a n d e n t e r p r i s e s do a s i g n i f i c a n t a m o u n t of R&D in t h e i r f i e l d s of p r o c u r e m e n t . G o v e r n m e n t r e s e a r c h is d o n e m o s t l y in t h e d e f e n s e sector, w h e r e a s public e n t e r p r i s e s are p a r t i c u l a r l y active in R&D r e l a t e d to t r a n s p o r t a t i o n , e n e r g y , a n d t e l e c o m m u n i c a t i o n . D a t a on C a n a d i a n p a t e n t s reveal g o v e r n m e n t o w n e r s h i p of a sizable n u m b e r of

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patents in various industries involved with the government market, such as electrical industrial equipment, aerospace, and scientific equipment. In these industries, g o v e r n m e n t m a y t r a n s f e r technology to industry. The level of public r e s e a r c h d e t e r m i n e s th e a m o u n t of g o v e r n m e n t technical aid offered to its suppliers. According to D. Mowery and N. Rosenberg, 62 if innovation originates in a need expressed by clients, a company must have a sufficient level of technological capacity to respond a d e q u a t e l y to t h a t n e e d . As a r e s u l t , it is t h e s t a t e of a d v a n c e d k n o w l e d g e t h a t l i m i t s t h e t e c h n i c a l p o s s i b i l i t i e s a v a i l a b l e to an innovating firm. Government intervention favoring knowledge adva nc e me nt lies at the level of the techno-scientific infrastructure. H o w e v e r , it is w e l l k n o w n t h a t sin ce g o v e r n m e n t s a r e c o m p l e x organizations, coordination of policies is difficult because it involves institutions t h a t pursue different objectives. 63 Coordination is even difficult b e t w e e n p r o c u r e m e n t policy decision m a k e r s . G o v e r n m e n t p r o c u r e m e n t is b o t h a p o l i t i c a l a n d a n administrative process. Other t h a n the problems already identified, one can single out the high n u m b e r of actors, a factor common to most large organizations. Product users, procurement managers, directors of public enterprises or government services, as well as politicians are all involved with supplier and product selection. Whereas users have the power of decision in establishing technical performance standards, managers are more interested in product cost and in possible social and economic spinoffs of procurement. Given the different objectives of the various actors, conflicts c a n a r i s e b e t w e e n m a n a g e m e n t a n d u s e r s , r e l i n q u i s h i n g p e r f o r m a n c e c r i t e r i a to secondary priorities. J. D. Roessner, 64 in his study of local government procurement in the United States, concluded t h a t t h e c h o i c e of t h e l e a s t e x p e n s i v e p r o d u c t o v e r t h e h i g h e s t performing and most innovative product, as well as the risks inherent in new product acquisition, are the major obstacles to the introduction of new technologies. In this case, institutional barriers inhibit the public buyer from supporting new products through procurement. P r o c u r e m e n t policies are difficult to m a n a g e because they serve two different ends. 65 Procurement is first and foremost a tool used to satisfy government needs to supply services. The primary criterion of product evaluation for the public u s e r is therefore performance. On the other ha nd, proc ure m e nt m u s t also meet various economic and social policy objectives. As we stressed earlier, another set of noneconomic objectives is often implicitly added.

Conclusion

The public sector is a user of m a n y innovations because certain services, for political, social, or economic r e a s o n s , r e q u i r e h i g h - p e r f o r m a n c e

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products. The most important factors that positively affect the d e m a n d for new products and supplier innovation are: the technological capacity of the public sector user, particularly when it acts as the lead user; the value of orders, which allows the supplier to reduce the risk associated to innovation; and the relation between needs and requirements. G o v e r n m e n t p r o c u r e m e n t o b v i o u s l y does n o t a l w a y s s t i m u l a t e innovation. In fact, the use of procurement policies has resulted in some well publicized fiascoes. Government intervention through procurement f a c e s s e v e r a l o b s t a c l e s d e r i v i n g f r o m its c h a r a c t e r i s t i c s as a governmental institution and the tendency to limit the purchase of new goods and services. These obstacles are both political and industrial, and m u s t be considered within the more general context of the relationship b e t w e e n s t a t e a n d i n d u s t r y : Political objectives can ad d goals t h a t r e d u c e t h e i m p a c t of p r o c u r e m e n t policies for i n n o v a t i o n a n d th e d e m a n d for new products, and suppliers tend to specialize and have less incentive to innovate. This review of studies on innovation in public m a r k e t s enables us to come to a n u m b e r of conclusions concerning innovation policy. Demand-side i ns t r um e nt s cannot be isolated from supply-side policies. As we have pointed out, firms have a g r e a t e r incentive to innovate if governments can also provide technical support. Therefore, in order to p r o p e r l y a p p r e c i a t e g o v e r n m e n t i n t e r v e n t i o n in i n n o v a t i o n , it is necessary to link the various instruments r a t h e r t h a n isolating them. As is p o i n t e d out in most s t u d i e s on t e c h n o l o g y policy, c o o r d i n a t i o n of policies is still far from being achieved, and remains a major challenge. 66 The choice of the better instruments for innovation policy has been an i m p o r t a n t subject discussed in the l i t e r a t u r e in recent years: Should governments intervene by supply-side or demand-side instruments? The c a s e s t u d i e s i n d i c a t e t h a t s u p p l i e r s a r e a f f e c t e d by a s e r i e s of i n s t r u m e n t s a n d t h a t s u p p l y - s i d e i n s t r u m e n t s , for i n s t a n c e , are essential. It should also be noted t h a t political and i n d u s t r i a l factors affect i n s t r u m e n t choice. For example, p r o c u r e m e n t policies can be applied only in a limited n u m b e r of industries in which, since the public sector needs goods and services, they cannot be deleted. The question is t h e n how to define good supply-side or demand-side instruments. Se ve ra l political a nd i n d u s t r i a l obstacles inhibit the o r i e n t a t i o n of procurement policy towards new product development. Innovation stems mostly from government buyer incentives that require higher performance products to find solutions to technical problems. The role of noneconomic factors is therefore essential for u n d e r s t a n d i n g how the public sector uses its demand. For instance, if a higher concentration of orders can be justified in the innovation theory, elected officials will most often be opposed to it because of its distributional impact. If my analysis is correct, the best way for g o v e r n m e n t s to promote innovation is to take on new projects or improve g o v e r n m e n t services t h a t will in t u r n force both government buyers and suppliers to surpass

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their respective levels of technical competence. Government procurement policies should be an indirect intervention: Their first goal should be the quality of government services and the use of the products and services for the public sector, which, in turn, will indirectly orient innovation in the industry. The q u e s t i o n of effectiveness, especially in m i l i t a r y p r o c u r e m e n t , should be addressed. There is a strong consensus that although research in military technology has in the past favored major innovations, it has c o n t r i b u t e d less to i n n o v a t i o n t h a n civil r e s e a r c h , e s p e c i a l l y w h e n m e a s u r e d by productivity indicators. 67 In addition, strong concerns are voiced regarding the fact that defense research is increasingly devoted to technologies t h a t have few immediate civilian applications, or the costs of whi c h are out of r e a c h for most civilian customers. In this sense, military research produces fewer spin-offs t h a n it did during the 1950s a n d 1960s. So t h e conclusion h e r e does not s u g g e s t an i n c r e a s e in military procurement. In fact, it seems that several civilian projects have led to i n n o v a t i o n , a n d t h a t s u c h s p e n d i n g h a s p o s s i b l y p r o d u c e d proportionally more innovation. A n o t h e r i m p o r t a n t issue concerning e f f e c t i v e n e s s is t h e h i g h l e ve l of s o l e - s o u r c e c o n t r a c t s d u e to, as m e n t i o n e d e a r l i e r , political, t e c h n i c a l , or e c o n o m i c factors. T h e s e effectiveness issues should be studied in greater detail. Two new trends in procurement policy have the capacity to affect the i m p a c t of i n n o v a t i o n . The first is a p r o p e n s i t y t o w a r d s f r e e r - t r a d e agreements. Their implementation will force certain public sector buyers to adapt to procurement practices. 68 Three obstacles limit the impact of these agreements. Most important procurements, such as energy, water, t r a n s p o r t a t i o n , telecommunications, and defense, are excluded. Their a p p l i c a t i o n is l i m i t e d to n a t i o n a l g o v e r n m e n t s , e x c l u d i n g s t a t e , p r o v i n c i a l , a n d l o c a l g o v e r n m e n t s . Also, t h e s u p e r v i s i o n of implementation is difficult since, due to the administrative process, it is difficult to d e t e r m i n e t h e a d e q u a c y of selection criteria. Two r e c e n t developments could, however, result in important shifts. 69 The first is t he EEC a g r e e m e n t , which will be in effect at the end of 1992. This a g r e e m e n t is t he first to cover a large sector of public p r o c u r e m e n t . Second, and probably most important, is the change through acquisitions a n d m e r g e r s in t h e s t r u c t u r e of some sectors active in g o v e r n m e n t procurement, such as telecommunications and power equipment. This could result in a specialization of national firms and an integration in international networks. To succeed, however, the standards between the same public sector services in different countries m u s t be harmonized so t h a t a firm can offer products t h a t can be procured in several countries. T h e second t r e n d is t h e p r i v a t i z a t i o n of public services. At first g l a n c e , of c o u r s e , p r i v a t i z a t i o n r e d u c e s t h e size of g o v e r n m e n t p r o c u r e m e n t . However, one of its c o n s e q u e n c e s is, due to extensive contracting of services, an increased level of services procurement. The impact of this t r e n d should be limited because public services, which

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h a v e t h e larger d e m a n d for n e w products, s u c h as d e f e n s e and public h e a l t h , are not affected.

Notes 1. EEC, The ~Cost of Non-Europe ~ in Public.Sector Procurement (Atkins Report) (Bruxelles, 1988). 2. R. Dalp6, C. DeBresson, a n d H. Xiaoping, "The Public Sector as F i r s t U s e r of Innovations," Research Policy, Vol. 21, no. 3 (1992), pp. 251-263; R. Dalp6 and C. DeBresson, "Le secteur public comme premier utilisateur d'innovations," L'Actualitd dconomique, Vol. 65, no. 1 (1988), pp. 53-70. 3. S .,~ MacManus, Doing Business with Government (New York: Paragon House, 1992). 4. R. R. Nelson (ed.), Government and Technical Progress - - A Cross-Industry Analysis (New York: Pergamon Press, 1982). 5. R. Hebert and R. Hoar, Government and Innovation: Experimenting with Change (Washington: National B u r e a u of Standards, 1982); R. Rothwell and W. Zegveld, Industrial Innovation and Public Policy (London: F r a n c e s Pinter, 1980); A u s t r a l i a n Science a n d Technology Council, Government Purchasing and Offset Policies in Industrial Innovation (Canberra, 1984); J. N. H. B r i t t o n a n d J. M. Gilmour, The Weakest Link: A Technological Perspective on Canadian Industrial Underdevelopment (Ottawa: Science Council of Canada, 1978); Science Council of Canada, Canadian Industrial Development: Some Policy Directions (Ottawa, 1983); Conseil de la science et de ia technologie, Le march~ public et le d~veloppement technologique au Quebec: six rapports d'dtude (Qu6bec, 1989); R. P r e m u s , D. K a r n s , a n d A. R o b i n s o n , Socioeconomic Regulations and the Federal Procurement Market (Washington: J o i n t Economic C o m m i t t e e Congress of the United States, 1985). 6. R. P r e m u s et al., op. cit. 7. F. R. Lichtenberg, "The Private R&D Response to Federal Design and Technical Competitions," American Economic Review, Vol. 78, no. 3 (1988), pp. 550-559; R. R. Nelson, op. cit.; R. Dalp6, C. DeBresson, and H. Xiaoping, "The Public Sector as First User of Innovations," op. cit. Research in t h i s a r e a s t u m b l e s on several methodological obstacles t h a t s t e m from the difficulty of m e a s u r i n g innovation and policy impact. G o v e r n m e n t procurement appears to be a very difficult i n s t r u m e n t to a n a l y z e b e c a u s e of its m a n y - s i d e d objectives; R. Dalp6, " L ' 6 v a l u a t i o n des p o l i t i q u e s d ' a c h a t , " Politique et management public, Vol. 6, no. 4 (1988), pp. 4 9 - 6 4 ; C. J e a n r e n a u d a n d D. Meyer, Marchds publics et dconomie des rdgions ( L a u s a n n e : P r e s s e s polytechniques romandes, 1985). 8. R. Rothwell and W. Zegveld, op. cit.; R. Rothwell, "Technology-based Small Firms and Regional Innovation Potential: The Role of Public Procurement," Journal of Public Policy, Vol. 4, no. 4 (1984), pp. 3 0 7 - 3 3 2 ; P. A. G e r o s k i , " P r o c u r e m e n t Policy as a Tool of I n d u s t r i a l Policy," International Review of Applied Economics, Vol. 4, no. 1 (1990), pp. 182-198. 9. R. Dalp6, "Barriers to Freer-Trade in G o v e r n m e n t Procurement," in G. Bertin and A. Raynauld (eds.), Economic Integration in Europe and North America (Paris: Clement Juglar, 1992), pp. 245-266. 10. D. Mowery a n d N. Rosenberg, "The Influence of M a r k e t Demand Upon Innovation: A Critical Review of Some Recent Empirical Studies," Research Policy, Vol. 7, no. 2 (1979), pp. 102-153; V. Walsh, ~Demand, Public Markets and Innovation in Biotechnology," Science and Public Policy, Vol. 20, no. 3 (1993), pp. 138-156. 11. E. Von Hippel, "A Customer-active Paradigm for Industrial Idea Generation," Research Policy, Vol. 7, no. 2 (1978), pp. 2 4 0 - 2 6 6 ; E. Von Hippel, "The D o m i n a n t Role of U s e r s in Scientific I n s t r u m e n t I n n o v a t i o n Process", Research Policy, Vol. 5, no. 3 (1976), pp. 212-239; P. Lotz, ~ D e m a n d - S i d e Effects on I n n o v a t i o n : Reflections on t h e D e v e l o p m e n t of D a n i s h Medical Technology" ( P a p e r p r e s e n t e d a t t h e w o r k s h o p D e m a n d , P u b l i c M a r k e t a n d I n n o v a t i o n , Montreal, May 1991); C. DeBresson and F. Amesse, "Networks of Innovators: A Review and Introduction to the Issue", Research Policy>, Vol. 20, no. 5 (1991), pp. 363-379. 12. P. G a r d i n e r and R. Rothwell, ~Tough Customers: Good Designs," Design Studies, Vol. 6, no. 1 (1985), pp. 7-17. 13. M. E. Porter, Competitive Advantage (New York: The Free Press, 1985).

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14. G. L. Urban and E. Von Hippel, ~Lead User Analyses for the Development of New Industrial Products," Management Science, Vol. 34, no. 5 (1988), pp. 569-582; E. Von Hippel, "Lead Users: A Source of Novel Product Concepts, ~ Management Science, Vol. 32, no. 7 (1986), pp. 791-805. 15. K Pavitt, ~Sectorial Patterns of Technical Change: Towards a Taxonomy and a Theory," Research Policy, Vol. 13, no. 6 (1984), pp. 343-373. 16. E. Von Hippel, ~rhe Dominant Role of Users in Scientific Instrument Innovation Process," op. cit. 17. R. Premus et al., op. cit. 18. S. T. Parkinson, ~The Role of User in Successful New Product Development," R&D Management, Vol. 12, no. 3 (1982), pp. 123-131. 19. I~ Pavitt, op. cit. 20. O. Grandstand and J. Sigurdson (eds.), Technological Innovation and Industrial Development in Telecommunications. The Role of Public Buying in the Telecommunication Sector in the Nordic Countries (Lund: Research Policy Institute, 1985). 21. R. Dalp~ and C. DeBresson, ~Le secteur public comme premier utilisateur d'innovations," op. cit. 22. F. R. Lichtenberg, Assessing the Impact of Federal Industrial R&D Expenditure on Private R&D Activity (First Boston Working Paper Series, FB-85-41, 1985); F. R. Lichtenberg,'The Private R&D Response to Federal Design and Technical Competitions," op. cir. 23. R. Hebert and R. Hoar, op. cit. 24. W. B. Arthur, ~Competing Technologies, Increasing Returns and Lock-in by Historical Events," The Economic Journal, Vol. 99, no. 394 (1989), pp. 116-131. 25. R. Hebert and R. Hoar, op. cit.; R. Rothwell, "Technology-based Small Firms and Regional Innovation Potential: The Role of Public Procurement," op. cit.; O. Grandstand and J. Sigurdson, op. cit. 26. S. Greenstein, "Going by the Book: The Costs and Benefits of Procedural Rules in Federal Computer Procurement," Science and Public Policy, Vol. 20, no. 3 (1993), pp. 157-172. 27. R. Hebert and R. Hoar, op. cit. 28. L. Bollinger, K Hope, and J.M. Utterback, "A Review of Literature and Hypotheses on New Technology-Based Firms," Research Policy, Vol. 12, no. 1 (1983), pp. 1-14. 29. R. Hebert and R. Hoar, op. cit. 30. 0. Grandstand and J. Signrdson, op. cit. 31. Supply concentration was studied, but not demand concentration. M. I. Kamien and N. L. Schwartz, ~Market Structure and Innovation: A Survey," Journal of Economic Literature, Vol. 13, no. 11 (1975), pp. 1-37. 32. J. I~ Galbraith, American Capitalism, The Concept of Countervailing Power (Boston: Houghton Milton Company, 1952); S. H. Lustgarten, 'The Impact of Buyer Concentration in Manufacturing Industries," The Review of Economics and Statistics, Vol. 57, no. 2 (1975), pp. 125-132; A. Caddington, Theories of the Bargaining Process (Chicago: Aldine Publishing Company, 1968). 33. P. Faucher, ~Procurement by State-Owned Enterprises: Potential and Limits for Industrial Development," in T. Hafsi (ed.), Strategic Issues in State-Owned Enterprises (Greenwich: J.A.I. Press, 1990), pp. 257-287. 34. R. R. Nelson, op. cit. 35. D. Mowery and N. Rosenberg, ~l~he Commercial Aircraft Industry," in R. R. Nelson, op. cit., pp. 101-161. 36. R. C. Levin, ~The Semiconductor Industry," in R. R. Nelson, op. cit., pp. 9-100. 37. F. Malerba, "Demand Structure and Technological Change: The Case of the European Semiconductor Industry," Research Policy, Vol. 14, no. 5 (1985), pp. 283-297. 38. K. Flamm, Targeting the Computer, Government Support and International Competition (Washington: The Brookings Institution, 1987). 39. R. Dalp~, ~Dimensions politiques des interventions publiques en technologie," Recherches sociographiques, Vol. 30, no. 3 (1989), pp. 447-463. 40. G. K. Smith, J. P. Stucker, and E. J. Simmons, Commercial and Military Communication Satellite Acquisitions Practices (Santa Monica: Rand Corp. R-3121-AF, 1985). 41. P. Cohendet and A. Lebeau, Choix stratdgiques et grands programmes civils (Paris: l~conomica, 1987); W. H. Lambright, M. Crow, and R. Shangraw, in J. D. Roessner (ed.), Government Innovation Policy - - Design, Implementation, Evaluation (New York: St. Martin's Press, 1988), pp. 63-74. 42. R. E. Baldwin, N o n t a r i f f Distortions of International Trade (Washington: The Brookings Institute, 1970); T. C. Lowinger, "Discrimination in Government Procurement of Foreign Goods

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