26 October 2016
The government should provide training and technical support for Hong Kong-based SMEs to bid for public contracts. Photo: HKEJ
The government should provide training and technical support for Hong Kong-based SMEs to bid for public contracts. Photo: HKEJ

Government procurement can spur innovation

To support innovation in industry, governments overseas have been proactive in adopting the fruits of research and development by local small and medium-size enterprises (SMEs).

Through such innovation-oriented procurement policies, a government can provide a testing ground and lead market for outstanding products, and researchers can build up their experience and reputation in the meantime.

This is the first advantage.

Second, given incomplete information, the market may not effectively respond to society’s latent demands for certain new technologies.

By articulating such demands in bid solicitations, the government does not only steer the development of new technologies but also helps jump-start innovation-based growth.

Innovation-oriented procurement policies encompass a series of measures. Common ones include:

1) Mandating the procurement of innovative products and their proportion.

For example, South Korea has implemented a New Technology Products Program, in which innovative products of local SMEs, after acquiring certain certificates, will be recommended by the Small and Medium Business Administration (SMBA) to all public entities.

The annual target set by the SMBA is for 10 percent of all SME products procured by public entities to be new-technology products.

2) Bid price preferences.

The government either gives discounts to SME bids or loads the lowest non-SME bid by a certain margin, thus making SME bids more competitive.

3) Set-asides.

The government sets aside a certain proportion of contracts that are exclusively reserved for bidding by eligible SMEs.

Other measures include:

- Trimming red tape and reducing the cost of bidding.

- Breaking large projects into several parts for bidding by SMEs.

- Allowing several SMEs to integrate their qualifications and strengths and bid for public contracts in the form of a cooperative.

- Providing training and technical support for SMEs to bid for public contracts.

- Helping promote the R&D products of SMEs.

The Hong Kong government has four procurement principles: public accountability, value for money, transparency and open and fair competition.

Encouraging innovation by SMEs is apparently not a major consideration.

Without doubt, the four principles are imperative in ensuring prudent use of public money and avoiding corruption.

Following these principles dogmatically, however, may run the risk of overkill and suffocating SMEs.

Some bureaucrats want to play safe and avoid any trouble.

As a result, SMEs and start-ups, even if their proposals are innovative and potentially game-changing, are more likely to be eliminated from consideration, because they lack the track record or credentials required under those principles.

In contrast, multinational corporations (MNCs) that command the advantages of fame, economy of scale and price often get the upper hand and find it easier to win public contracts.

Some even reportedly cash in by subcontracting public contracts to local SMEs at much lower prices.

Ironically, large companies are more likely to be subject to “organizational inertia” and less innovative, as scholars Eric Baark and Naubahar Sharif point out.

Nevertheless, the city does have an example of a de facto government procurement in support of innovation and technology.

When the development of the Octopus Card started in 1992, the MTR was still wholly owned by the government.

As Baark and Sharif wrote, the MTR’s decision to fully adopt relevant technologies ensured that the Octopus Card could enjoy an enormous “captive market” right from the beginning.

This decision by the government is the key to the success of the Octopus Card.

Neglecting the importance of innovation-oriented procurement, the scholars warned, would let slip opportunities to strengthen the innovation-based economy.

In 2012, the government launched the “Public Sector Trial Scheme”, subsidizing the production of prototypes or samples to be trialed in public entities.

Projects fulfilling certain requirements may receive funding of up to 100 percent of their original R&D expenditure.

The scheme is definitely a big step forward and deserves support.

Yet, at the end of the day, it falls short of a fully fledged innovation-oriented procurement policy, and questions remain as to how many excellent items are really adopted by the government after going through the trial scheme.

Among IT products and services, for example, of the 900 contracts awarded by the government through the “Standing Offer Agreement for Quality Professional Services” in the past three years, only 22 percent were awarded to SMEs.

The challenges faced by local SMEs are evident.

The government should give proper consideration to supporting homegrown innovations and offsetting unfair dominance of the market by large MNCs, while conforming to the World Trade Organization Agreement on Government Procurement.

Bureaucrats should be more open-minded with respect to innovation and technology.

In the long term, the government ought to explore the feasibility of recognizing innovativeness as an official procurement principle with which officials can justify their choice of innovative proposals.

Ben Lee wrote this article

– Contact us at [email protected]


Savantas Policy Institute

EJI Weekly Newsletter