Supply-side versus Demand-side Innovation Policies: Exploring the Impacts of Public Procurement of Innovation in Peru

This paper exploits new data on the participation of Peruvian firms on public tenders to shed light on the potential for public procurement to encourage innovation. Many industrialized countries have gradually enlarged their innovation policy mix to include demand-side interventions, among them the use of public procurement to stimulate innovation investment at the firm level. Latin America, though, exhibits an unbalanced policy mix with little deployment of policy interventions that tackle the conditions that affect the demand for innovation. Using nonexperimental impact evaluation techniques, this research not only assesses the impacts of participating in public procurement projects on firm-level innovation efforts and outcomes but also compares these impacts with traditional supply-side approaches. The findings suggest that public procurement has a significant impact on innovation outcomes, but the results only hold when public procurement requires the development of new solutions. Regular or noninnovative public procurement does not show any impact on firm-level innovation.