Public procurement as innovation policy: The case of the Swedish combat aircraft Gripen

Since the establishment of Saab in 1937, Sweden has manufactured, and with time also developed its own military aircraft. During the 26 year period 1982 through 2007 77 billion SEK in 2007 prices were invested in the development of the multipurpose combat aircraft Gripen. The technical spillovers created around this  industrial project  have been identified and quantified. 

I find that had the Gripen development budget instead, and over the years been invested in financial markets the social value foregone by the Swedes during the same period would have been 131.5 billion SEK by the end of 2007, or on average 0.17 percent of Swedish GNP per year. In return, realized and identified spillover values in the form of new firm establishment and productivity improvements in existing civilian production on technologies created as part of Gripen development of at least 350 billion SEK had been generated (net of opportunity costs, or the estimated alternative economic value creation of the same R&D being instead invested elsewhere in non Gripen investments), or on average at least 0.43 percent of GNP per year. 

Advanced industrial projects generate a cloud of new technologies (“spillovers”). This is a natural consequence of overcoming the technical hurdles  associated with the development and application of new technologies in new products and manufacturing processes, always needed to realize  advanced projects. The new technologies can be more or less generally applied in different contexts, and therefore appear as unpredictable innovations. Recognizing spillovers, or not recognizing them, therefore makes all the difference in a correct social cost benefit analysis of a public procurement project. The magnitude of local (“national” ) social value creation, however, depends critically on the local entrepreneurial environment, or on the  local capacity to commercialize the innovative technology flow created (receiver competence). Of particular interest is how to transfer ex post data from the original Gripen development  to an ex ante cost benefit analysis of the upgraded version of Gripen for the Swedish Air force, and for exports to Switzerland and Brazil, countries that have recently decided to acquire the Gripen aircraft for their air forces. 

In my analysis public procurement of sophisticated public goods and services emerges as an efficient form of innovation policy, and the advanced firm as a technical university providing essentially the same services to industry in the form of training and experience in production and technology development.