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The Economic Rationale for PCP

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Trials and Tribulations in the Implementation of Pre-Commercial Procurement in Europe

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Abstract

The purpose of this chapter is twofold: to test whether the policy expectations are realistic and to identify under which economic conditions PCP can be expected to be effective. To this end, I will compare the policy expectations assumptions against authoritative economic theories and studies, beyond those commissioned by the EU policy-makers.

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Notes

  1. 1.

    Commission 2007a, b, 3–5. PCP Expert Group 2006, 5, 24.

  2. 2.

    Manne and Wright 2009, 10–1.

  3. 3.

    Beinhocker 2006; Taleb 2010.

  4. 4.

    Baker 2007.

  5. 5.

    Ibid.

  6. 6.

    A comprehensive outline of the limitations of economic measurements is offered by Freeman and Soete 2007.

  7. 7.

    Scotchmer 2004, 282.

  8. 8.

    Gilbert 2007a, 17; Ottaviano et al. 2003, 18–9.

  9. 9.

    Basu et al. 2003.

  10. 10.

    Scotchmer 2004, 269.

  11. 11.

    Lipsey 2007, 5–28.

  12. 12.

    Lipsey 2007, 25.

  13. 13.

    Freeman 1982, 216–20; Coombs et al. 1987, 30.

  14. 14.

    Taleb 2010.

  15. 15.

    Von Hayek 1945, 519–30.

  16. 16.

    Hayek 2002, 11–2.

  17. 17.

    Hayek 2002, 11–2.

  18. 18.

    Beinhocker 2006, 323.

  19. 19.

    Tversky and Kahneman 1974.

  20. 20.

    Gigerenzer and Gaissmaier 2011, 451. Heuristics can be defined as ‘a strategy that ignores part of the information, with the goal of making decisions more quickly, frugally, and/or accurately than more complex methods’.

  21. 21.

    Gigerenzer and Gaissmaier 2011, 451–2. Davidson 2009, 35–43.

  22. 22.

    Gigerenzer and Gaissmaier 2011, 450.

  23. 23.

    Beinhocker 2006, 426.

  24. 24.

    Beinhocker 2006, 324, 334.

  25. 25.

    Scotchmer 2004, 56–7.

  26. 26.

    See for example, the 1992 Rio Declaration or the United Nations Framework Convention on Climate Change. One common definition sounds as follows: ‘Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation’.

  27. 27.

    Sunstein 2005, 37.

  28. 28.

    Sunstein 2005, 9.

  29. 29.

    Sunstein 2005, 55.

  30. 30.

    Sunstein 2005, 12.

  31. 31.

    Sunstein 2005, 55.

  32. 32.

    Smith 1904, para I.1.9.

  33. 33.

    Schumpeter 1954, 83.

  34. 34.

    Schumpeter 1939.

  35. 35.

    Schumpeter 1939; Allen 1991, 71–87.

  36. 36.

    Acs and Audretsch 2010.

  37. 37.

    Freeman and Soete 2000, 325.

  38. 38.

    Reference found in Gortz 2001, 236.

  39. 39.

    Schumpeter 1939, 84.

  40. 40.

    Beinhocker 2006, 40–1. Solow 1956; Solow 1957, 312–20.

  41. 41.

    Output (Y) is a function of the quantity of physical capital (K) and human labour (L): Y = F (K, L).

  42. 42.

    Quoted from Godin 2009, 18; Godin and Lane 2013.

  43. 43.

    Quoted from Godin 2012; Mesthene 1969; OECD 1972.

  44. 44.

    Godin 2012, 36–7.

  45. 45.

    Romer 1990.

  46. 46.

    During the Second World War, government funded R&D successfully led to the development of weapons and of medical treatment for infectious diseases. Nelson 1990, 209.

  47. 47.

    Davidson 2009, 13–8.

  48. 48.

    Godin 2009, 91, 94.

  49. 49.

    Godin 2009, 96; OECD 2001, 4.

  50. 50.

    Audretsch 1995; OECD 1992a, 1992b, 1996, 2016.

  51. 51.

    Audretsch and Thurik 2003, 41.

  52. 52.

    Ulku 2004, 4–5; Griffith et al. 2000.

  53. 53.

    Yusuf 2007, 10-1. Two-thirds (2 % of GDP) should come from the private market.

  54. 54.

    Wessner 2004.

  55. 55.

    Mowery and Rosenberg 1993, 39.

  56. 56.

    In 1985, only 12 % was performed in federal laboratories, while 73 % was performed by private industry. Mowery and Rosenberg 1993, 41–2.

  57. 57.

    Mowery and Rosenberg 1993, 46.

  58. 58.

    80 % of the federal R&D funds were dedicated to defense research in the 1960s. In 1983, only around 14 % of the military R&D budgets were dedicated to basic and applied research, while nearly 86 % went to development of weapon system, construction and testing of prototypes. Mowery and Rosenberg 1993, 43.

  59. 59.

    Friedmann 1962; Arrow 1962, 619.

  60. 60.

    Freeman 1982, 15.

  61. 61.

    Nelson 1990; Aghiou et al. 2005, 701–28; Boone and Van Damme 2004, 71–92.

  62. 62.

    Such as when innovation contributes to depletion of natural resources instead of enabling their conservation. Cooter et al. 2011, 11–2; Yusuf 2007, 3. Stiglitz argues the need for public intervention, justified by the fact that the relation between fluctuations in the economy and fluctuations in innovation goes both ways, and by the fact that the free market left to itself will not always choose the most positive equilibria resulting from the positive feedback between economy and innovation. See Stiglitz 1994, 121–54.

  63. 63.

    Gilbert 2007b.

  64. 64.

    Externalities are about benefits (and costs) of private economic activity that those who make the relevant decisions do not see as benefits (or costs) to them’. See Nelson 2004.

  65. 65.

    Commission 2006; Inman 1987, 647–777; Baarsma et al. 2010.

  66. 66.

    Swann 2003, 335–60; Brynjolfsson and Zhang 2006, 3.

  67. 67.

    Polanyi 1962, 54–72.

  68. 68.

    Lipsey 2007, 5–28.

  69. 69.

    Benjamin and Rai 2008, 12. See also Romer 1994, 20–1.

  70. 70.

    Wessner 2004 points out that few investors in the 1980s understood Bill Gates vision for Microsoft.

  71. 71.

    Swann 2003, 335–60.

  72. 72.

    Baarsma et al. 2010, 39–40.

  73. 73.

    The public costs of correcting market failures are high because the public intervention will try to bring about private transactions between partners with non-reciprocal interests. See also B. Baarsma et al. 2010, 39–40.

  74. 74.

    Hans W. Friederiszick, Lars-Hendrik Roller, and Vincent Verouden, ‘European State Aid Control: An Economic Framework’ 2005, 637 http://ec.europa.eu/dgs/competition/economist/esac.pdf Accessed 8 April 2013; Baarsma et al. 2010.

  75. 75.

    Mowery and Rosenberg 1993, 55–8.

  76. 76.

    Magnus Gulbrandsen and Henry Etzkowitz, ‘Convergence Between Europe and America: The Transition from Industrial to Innovation Policy’ 1999 Journal of Technology Transfer 24.

  77. 77.

    Freeman 1982, 198–201.

  78. 78.

    Edquist C., ‘Innovation Policy: a Systemic Approach’, in D. Archibugi and B.Å. Lundvall (eds) ‘The Globalizing Learning Economy’ OUP 2001; Smith K., ‘Innovation as a Systemic Phenomenon: Rethinking the role of Policy’ 2000 1 Enterprise and Innovation Management Studies 1, 73–102.

  79. 79.

    Carlsson B. and S. Jacobsson, ‘In Search of Useful Public Policies: Key Lessons and Issues for Policy Makers’ in B. Carlsson (ed) ‘Technological Systems and Industrial Dynamics’ Kluwer Academic Publishers 1997.

  80. 80.

    Malerba F., R. Nelson, L. Orsenigo and S. Winter, ‘History-friendly models of industry evolution: the computer industry’ 1999 8 Industrial and Corporate Change 1, 3–40.

  81. 81.

    Chaminade C. and C. Edquist, ‘From Theory to Practice: The Use of the Systems of Innovation Approach for Innovation Policy’ in J. Hage and M. Meeus (eds), ‘Innovation, Science and Institutional Change’ OUP 2006.

  82. 82.

    Freeman 1982.

  83. 83.

    Edler et al. 2002, 5.

  84. 84.

    Beinhocker 2006, 97.

  85. 85.

    Beinhocker 2006, 11–2, 17–8.

  86. 86.

    Beinhocker 2006, 427. Bakhshi et al. 2011.

  87. 87.

    Metcalfe and Georghiou 1997, 7.

  88. 88.

    Beinhocker 2006, 339–40.

  89. 89.

    Mazzucato 2013, 18–9.

  90. 90.

    Mazzucato 2013, 49.

  91. 91.

    Mazzucato 2013, 49.

  92. 92.

    Ruttan 2006.

  93. 93.

    They rate the importance of the considered innovations based on R&D Magazine’s annual awards.

  94. 94.

    Block and Keller 2010.

  95. 95.

    Scotchmer 2004 argues: ‘In the US, for example, R&D performed by industry now comprises a hefty three-fourths of the total. Nevertheless, the R&D performed by universities and the federal government is also substantial. Most industrial R&D is applied, while most R&D in universities is basic research. Even though universities perform only 14 % of R&D, they perform about half of total basic research. Federal government funds 26 % of total R&D, including grants to universities, firms, and federally funded research and development centers, which are run by firms and universities but are not owned by them. Only ¼ of the federally funded research takes place intramurally in government laboratories. Even though the federal government funds 26 % of R&D, its employees perform only 7 % of the total R&D. This is why industry and universities perform much more R&D than they fund. Industry only receives 10 % of its R&D budget from the government.’

  96. 96.

    Engel 2002.

  97. 97.

    Caselli et al. 2006, 6.

  98. 98.

    Gompers and Lerner 1999, 11.

  99. 99.

    Caselli et al. 2006.

  100. 100.

    Kortum and Lerner 2000.

  101. 101.

    Kortum and Lerner 2000, 686. Gompers and Lerner 1999, 8.

  102. 102.

    Jacobs 2002.

  103. 103.

    Kline and Rosenberg 1986, 295.

  104. 104.

    Lerner 1999.

  105. 105.

    Mazzucato 2013, 41.

  106. 106.

    These are internal VC funds established by corporations as subsidiaries.

  107. 107.

    Chemmanur et al. 2012; Lantz and Sahut 2010, 8.

  108. 108.

    Lantz and Sahut 2010, 39.

  109. 109.

    Tian and Wang 2011, 3.

  110. 110.

    Nanda and Rhodes-Kropf 2011, 1–2.

  111. 111.

    Stam 2008, 34, 40–1; Nanda and Rhodes-Kropf 2011, 5, 38. Spiegel and Tookes 2008, 3; Stiglitz and Weiß 1981; Binks and Ennew 1996, 17–25.

  112. 112.

    Caselli et al. 2006, 22.

  113. 113.

    In 2002, the level of venture capital investment has fallen from € 6.7 billion in 2001 to € 4.2 billion. See Independent Expert Group 2003, 6.

  114. 114.

    Veugelers and Cincera 2010.

  115. 115.

    PCP Expert Group 13.

  116. 116.

    Auerswald and Branscomb 2003, 3–4.

  117. 117.

    Mazzucato 2013, 41.

  118. 118.

    Lerner 1999, 17.

  119. 119.

    Mazzuccato 2013.

  120. 120.

    Scientific content can be defined as the body of learning which is a necessary precondition of future innovations. This is a departure from initial innovative processes which were exclusively associated with the persons involved in the production. Freeman and Soete 2007, 10.

  121. 121.

    Godin 2010, 6.

  122. 122.

    Maclaurin 1953.

  123. 123.

    According to Freeman, the massive public investments in R&D during and after the WWII brought breakthrough innovations.

  124. 124.

    Based on the analysis of major weapon technologies, one study concluded that only 0.3 % of the innovations derived from basic research. Sherwin and Isenson 1967, quoted from Godin and Lane 2013, 8–9.

  125. 125.

    Godin and Lane 2013, 8–9.

  126. 126.

    Schmookler 1966.

  127. 127.

    Mowery and Rosenberg 1979. Demand can be defined as the ‘willingness to pay a certain price for the satisfaction of a need or want’. See Edler 2013, 8.

  128. 128.

    Freeman 1979, 213.

  129. 129.

    Freeman 1995, 19.

  130. 130.

    Edquist and Hommen 1999, 66.

  131. 131.

    Mowery and Rosenberg 1979, 142.

  132. 132.

    Mowery and Rosenberg 1979, 145.

  133. 133.

    Mowery and Rosenberg 1979, 143–4.

  134. 134.

    Mowery and Rosenberg 1979, 149.

  135. 135.

    Mowery and Rosenberg 1979, 149.

  136. 136.

    Kline and Rosenberg 1986, 286.

  137. 137.

    Kline and Rosenberg 1986, 286.

  138. 138.

    Kline and Rosenberg 1986, 296.

  139. 139.

    Kline and Rosenberg 1986, 278.

  140. 140.

    For a detailed account of the emergence of these innovations, see Johann Murmann 2000.

  141. 141.

    Arthur 2010, 157–9.

  142. 142.

    Urban and von Hippel 1986.

  143. 143.

    Urban and von Hippel 1986, 19.

  144. 144.

    However, lead users are not the same as early adopters. Lead users feel the need before the product is available on the market, before early adopters.

  145. 145.

    Urban and von Hippel 1986.

  146. 146.

    Porter 1990.

  147. 147.

    Porter 1990, 82.

  148. 148.

    Porter 1990, 87.

  149. 149.

    Georghiou 2006.

  150. 150.

    Gheorghiou 2006, 13.

  151. 151.

    http://ec.europa.eu/enterprise/policies/innovation/policy/lead-market-initiative/#h2-3.

  152. 152.

    Nesta 2010, 14; Edler 2013.

  153. 153.

    Izsak and Edler 2011, 18.

  154. 154.

    Cabral et al. 2006.

  155. 155.

    Malerba et al. 2008, 67.

  156. 156.

    In the UK, for example, studies show that in many sectors, a large share of spending on innovation is oriented towards marketing and preparing the market, rather than on understanding the needs and preferences of customers. See DTI 2006.

  157. 157.

    Edler and Georghiou 2007, 955.

  158. 158.

    Dalpé et al. 1992, 252.

  159. 159.

    Mowery and Rosenberg 1979, 148.

  160. 160.

    Malerba et al. 2008.

  161. 161.

    Neija and Åstrand 2006; Neija 2001.

  162. 162.

    Beise and Rennings 2005.

  163. 163.

    Arinivas 2006.

  164. 164.

    Palmberg 2004.

  165. 165.

    In a functional model of innovation systems the seven conditions which influence innovation are: qualitative public research, openness (of individuals to seek and share knowledge and the existence of physical infrastructure which facilitates effective exchange of knowledge), commercial motivation and entrepreneurship, demand for innovation, a competitive market that facilitates entry, rewards successful innovators and selects out poor performers, access to finance and available and qualitative human resources. See Miles et al. 2009, 11–2.

  166. 166.

    Miles et al. 2009, 16–7.

  167. 167.

    Rothwell and Zegveld 1981.

  168. 168.

    Geroski 1990, 182–98; Dalpé 1994, 16.

  169. 169.

    Aschhoff and Sofka 2008.

  170. 170.

    Georghiou et al. 2013, 7.

  171. 171.

    Commission 2007a, 4, 9, 10; Commission 2007b, 2–3, 10–1.

  172. 172.

    Commission 2007a, 2–3, 8; Commission 2007b, 3–4, 8.

  173. 173.

    Services are difficult to define. According to Bryson et al. service functions/activities ‘refer to tasks that are being carried out in connection with productive processes and consumption of both goods and services’. Bryson et al. 2004.

  174. 174.

    Barras 1986 concluded that service innovations are characterized by a reverse product cycle (RPC) made of three stages: (1) improved efficiency phase, which means an investment in new technology to increase the efficiency of delivery of existing services; (2) improved quality phase, in which technology is used to improve the quality of services; and, ending the cycle, the stage (3) new products phase, which consists, basically, of the generation of new services.

  175. 175.

    Vence and Trigo 2009.

  176. 176.

    Un and Montoro-Sanchez 2010, 137.

  177. 177.

    The most important are: online banking, telephone monitoring tools, new or enhanced software or computer networks, application of new methods of risk diversification, optical-electronic document filing, paper-free office management, improved points payment systems, introduction of point-of-sale marketing policy and introduction of new rating or scoring methods.

  178. 178.

    Hollenstein 2003.

  179. 179.

    ‘Business services cover a broad spectrum of services principally traded in business-to-business transactions. These intermediary services range from software development to temporary-labour agencies, from equipment rental to economic consultancy, and from translation services to accountancy’. See Commission 2009, 17.

  180. 180.

    Vence and Trigo 2009.

  181. 181.

    Hipp and Grupp 2005.

  182. 182.

    Abreua et al. 2010, 115.

  183. 183.

    Commission 2009, 9.

  184. 184.

    Examples of knowledge intensive service activities (KIS) include: research and development (R&D), management consulting, ICT services, human resource management and employment services, legal services (including those related to IPR) accounting, financing, and marketing-related service activities.

  185. 185.

    Un and Montoro-Sanchez 2010; Barras 1986.

  186. 186.

    Griliches 1992; Abreua et al. 2010; Vence and Trigo 2009.

  187. 187.

    Commission 2009, 34–5.

  188. 188.

    Abreua et al. 2010, 99–118.

  189. 189.

    Rubalcaba and Den Hertog 2010.

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Apostol, R. (2017). The Economic Rationale for PCP. In: Trials and Tribulations in the Implementation of Pre-Commercial Procurement in Europe. T.M.C. Asser Press, The Hague. https://doi.org/10.1007/978-94-6265-156-2_3

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