Learning from winning firms: Government innovation procurement and peer innovation efficiency

Governments are major purchasers of goods and services globally. Although previous research highlights the role of government procurement in shaping business activities, the spillover effects on peer firms' innovation efficiency remain unexplored. Through a textual analysis that distinguishes innovation procurement from general government purchases, this study investigates the effects and underlying mechanisms of government innovation procurement on the innovation efficiency of peer firms. We find that government innovation procurement significantly enhances peer firms' innovation efficiency. Our mechanism analyses reveal that government innovation procurement sends positive signals, increasing peer firms' citations of procured firms' patents, thereby improving their innovation efficiency. The heterogeneity analyses indicate that this positive relationship is more pronounced when peer firms occupy comparable market positions, operate in regions with high-speed rail, have common analysts with the procured firms, and are classified as high-tech enterprises. We also find that central government procurement, cross-regional procurement, and evaluation methods involving “competitive consultation and negotiation” significantly enhance peer firms' innovation efficiency. Overall, our findings provide theoretical guidance and practical insights for governments to foster firm innovation and advance high-quality industrial development through innovation procurement.