The effect of increasing the scale of demand on the emergence of innovative firms in public procurement

Purpose This study aims to examine the association of demand scale expansion on the emergence of innovative firms in public procurement. It investigates how the size of overall demand and number of procurement opportunities influence the generation of innovative construction companies in Japan. Design/methodology/approach Using public procurement data from Japan’s construction industry (2006–2020), this study uses a move-to-front model to explain innovation emergence and applies fixed-effects panel analysis to examine how demand scale impacts innovative firm creation across different regional markets over time. Findings This study identifies a significant positive relationship between the emergence of innovative firms and both the total procurement volume and the number of procurement opportunities. Specifically, increasing both the total procurement budget and the number of procurement opportunities is more effective for stimulating innovation than simply increasing average project size. The elasticity of innovation with respect to total budget exceeds one, suggesting that increases in the budget are associated with proportionally greater effects on innovation than increases in procurement opportunities alone. Practical implications The findings indicate that both business expansion orientation and price sensitivity orientation are necessary conditions for innovation. Public procurement can be strategically structured to stimulate innovation by increasing both the total budget and the number of procurement opportunities, rather than concentrating solely on large-scale projects. Social implications Strategic management of public procurement can significantly influence innovation in the construction industry, with potential benefits for economic growth, infrastructure development and public service delivery. Originality/value This study offers a novel theoretical and empirical contribution by applying a move-to-front model – previously unexplored in the context of public procurement – to explain how demand scale influences the emergence of innovative firms. Using rich panel data from Japan’s construction sector (2006–2020), it demonstrates that total procurement volume and opportunity frequency significantly affect innovation outcomes. By linking competitive bidding structures to innovation dynamics, the study provides actionable insights for policymakers seeking to stimulate innovation through strategic demand-side instruments, particularly in sectors where public procurement constitutes a major share of market activity.