The impact of public procurement on financial barriers to general and green innovation

Abstract

This study investigates whether public procurement mitigates or exacerbates innovative enterprises’ financial constraints. We distinguish between general and environmentally beneficial innovative enterprises. Theory suggests that the treatment effects of public procurement, particularly when mediated by the demand-pull effect, may lower a company’s funding constraints for innovation. We test this theory with extended probit models allowing for endogenous treatment and selection. The findings reveal a significantly positive treatment effect of public procurement on the probability of facing financial constraints in both areas: general and environmentally beneficial innovative activities. Thus, the principal implications of this study are (1) that being an innovating SME exacerbates financial constraints and (2) that strengthening SMEs’ participation in European public tenders would not contribute to lowering SMEs’ financial constraints. On the contrary, complementary grants or other financial incentives might be necessary to substantially increase the SMEs’ bidding rates in public tenders.