Many have argued that
governments can improve growth by procuring “well”, that is to say, in such a
fashion that will promote innovation. In
Europe there is a lot of romance about some US examples like DARPA or the SBIF
or Apollo/Manhattan programs. But what
are the facts? David Mowery gave a
wonderful presentation today on lessons of procurement from the US. Here is my
take on it.
1. 1.
US public
procurement is separated in the data from R&D. Federal procurement is
actually 63% military. The non-defense
part of procurement is mostly energy, federal housing and veterans admin
(mostly drugs and hospital equipment).
2.
2. Note that
DARPA and SBIR are not, in the data, procuring.
They are under separate accounts, but besides the accounting point, the
important point is that there is an R&D and a procurement program i.e. two
instruments. The former might be used
for R&D and the latter for buying the cheapest regardless of
innovation. Or the latter might be used
to complement the former. But with two
instruments its not necessarily the case that not using procurement for
innovation is missing a trick.
3.
3. The Apollo
and Manhattan projects were designed deliberately not to be adopted in the
private sector. So that is very
different to e.g. using procurement to trying to find a solution to a grand
challenge, like health.
4.
4. Procurement
can take many firms
a.
Paying just
for the prototype. That might encourage
innovation just up to an early stage.
b.
Requiring,
as in the case of semiconductors, more than one supplier when procuring. That helps competition and information
sharing between the two suppliers.
c.
Paying for
the whole project but not promising to then buy the final product.
d.
Paying for
the whole project and also buying the final product perhaps from one supplier
5.
some
practical details.
a.
Most
procurement can be thought of as demand pull.
It procures a product for a particular government missions.
b.
Less common
are policies to specifically encourage particular new technologies e.g.
deliberately buying innovative energy products to push a green agenda.
6.
How might
benefits to innovation from procurement come via the demand pull mechanism?
a.
A lead
customer who buys the product might helps firms learn, give them scale
economies etc.
b.
Procurement
contracts might require new suppliers or
might legitimize standards.
7.
Perhaps
most interesting are some cases.
a.
The big
success is IT. In the 1950s the US
military procured a lot of e.g. software
and semiconductors. This helped Texas
Instruments for example to develop semiconductors and seems to have crowded in
other suppliers. Note that one provision
of this program was that more than one supplier was needed and this made
sharing of information and common standards in the industry a common practice.
But note that by the late 1960s, the military was buying a very small share of
IT products, so exit by the public sector was important. In addition, the projects were, in fact,
highly complementary to private sector needs.
Indeed, they are the victims of their own success: the military now buys
software from the private sector since it’s more advanced. An attempt by the military in the 1980s to
have its own software was a failure. So
ultimately the success was to develop something that was very complementary to
private sector needs and the private sector just took over the lead.
b.
Perhaps
less well known are some failures. For
example, in the 1970s/80s the USAF tired to develop CNC machine tools but they
were a failure: the Japanese did much better.
Another example was civilian nuclear power. This program focused on PWRs since they were
going to be used by nuclear subs. They
were a failure, unsafe and became unused etc.
8.
so what are
the lessons?
a.
If the
project is aligned with civilian needs, then more chance to be widely
adopted. Very hard to say ex ante:
indeed totally impossible. Components
will have more chance rather than a whole system perhaps. Or maybe the link is endogenous, maybe
procurement can try to encourage sharing etc.
b.
There’s a
natural tension between wanting to get the lowest price and wanting to support
innovative products which might be expensive.
But when there are two targets you need two instruments and you have
this: an R&D and a procurement budget.
c.
The Apollo
and Manhattan projects highlight that the purpose of the project has to be
clear: they were never intended for public use, so aren’t good examples of encouraginginnovation. Indeed, that is case where the procurement
project was a different instrument to the R&D budget.
d.
Supporting
prototypes might be good since they don’t mean lock into a whole project. But
prototypes are impossible in some technologies e.g. nuclear submarines.
Finally, in the
discussion, David Mowery made some other very interesting points. My interpretation of them are:
1.
the romance
with SBIR is misplaced. There are very
few rigorous studies of its effectiveness and what studies there are show very
mixed results
2.
Much of
venture capital in the US does not just supply money. It also provides managers, help with business
plans etc. that’s why some of them are very local, since they are tailor to
local labor market needs. So it may not
be something that the EU can imitate by just providing money if the EU cannot
also supply the other skills and advice.
3.
Regarding
tech transfer, everyone seems to concentrate on the gross return that
universities make from ownership of IP.
The net return, aside from some very few top universities, is very
modest, because it costs a lot of money to run the office and do the work. In particular, it costs a lot for patent
attorneys (although these costs might be reduced by universities sharing
facilities).
