Does Public Procurement Promote Markets for New Technologies? Implications for Competition and Small Firms

ABSTRACT This study examines the role of public procurement in stimulating innovation in the United States, with particular attention to small and medium‐sized enterprises (SMEs). Public procurement of innovation (PPI) is widely regarded as a demand‐side policy instrument that can generate lead markets for emerging technologies, yet its scope and structural dynamics remain underexplored in large economies. To address this gap, we analyze more than 46 million procurement contracts (2007–2021) from USAspending.gov using a text‐mining approach informed by disruptive technology keywords from Bloom et al. We find that innovation‐related contracts constitute only 0.12% of the total, with SMEs securing around 41%. Nonetheless, SMEs face persistent difficulties in winning follow‐on contracts, reflecting resource limitations. Moreover, results reveal an inverted U‐shaped relationship between competition and innovation procurement, indicating that moderate competition fosters innovation most effectively. The study contributes to theory by extending the Resource‐Based View (RBV) to public procurement, demonstrating how resource heterogeneity and immobility shape outcomes in government‐led markets. Practically, we provide policy insights to strengthen SME participation in PPI through targeted support and simplified procedures, thereby advancing both innovation policy and SME competitiveness.