Public Procurement As a Vehicle of Innovation – What Does the Inverted-U Relationship Between Competition and Innovativeness Tell Us?

This paper contributes to the literature on the role of public procurement in encouraging innovations in the economy by empirically examining how the inverted-U relationship between competition and innovation is related to SME behavior in public procurement. First, we establish the inverted-U relationship in our data. We find that lima-provincial suppliers' (SMEs supplying mainly to public sector customers in their own municipality and province) are less innovation-oriented than 'supra-provincial suppliers' (supplying mainly to public sector customers residing outside their own province). In addition, a descriptive analysis suggests that the innovativeness of infra-provincial suppliers exhibits a weakly positive relationship with competition. However, the innovativeness of supra-provincial suppliers appears to be negatively related to competition at high levels of competition, but not at low levels of competition.