Hypothesis of the quantitative research

In the following, we conceptualise three channels – demand pull; standard adoption; and innovation – through which government purchases could influence firms’ production choices (see Figure 6). For each channel, positive and negative hypotheses are formulated.

Hypothesis 1 – Sales of sustainably-certified products

From a positive perspective, SPP could create or enlarge (the perception of) business opportunities for sustainably produced products in local markets (Trionfetti, 2000; Blind, 2013; Edler & Georghiou, 2007; Uyarra, Edler, Garcia-Estevez, Georghiu, & Yeow, 2014). In doing so, SPP may create the “critical mass” (demand) and competition to overcome a lack of or the perception of a lack of profitable business opportunities (Edler

& Georghiou, 2007; Uyarra et al., 2014), which have been argued to be crucial impediments to growth in investment-constrained countries (Rodrik

& Subramanian, 2009).

From a negative perspective, it is however questionable whether SPP creates sufficient demand to actually increase sustainable production locally. Firstly, sufficient critical mass only occurs if several procurement offices act jointly, for example, targeting a specific product (Lundberg et al., 2016). Secondly, without a “buy-local” clause, SPP may increase imports rather than local output where the local industry is relatively weak (Trionfetti, 2000). For example, in Paraguay, Auriol et al. (2016) found firms that specialised in import intermediation for public procurement as a result of a low local industrial capacity. SPP may actually make local prices for sustainable

Figure 6:Hypothesised causal chains from public procurement to sustainable development Demand pull Innovation•Likelihood to innovate •Sales with innovative products

Policy effects Sustainable development

PolicymakingFirm-level measurement Conventional Public Procurement (CPP)

Sustainable Public Procurement (SPP) Inclusion of sustainability criteria into governments’

purchaising decision Standard adoption

• •

Sales of sustainability certified products Export likelihood & sales •Have sustainable certification •Require suppliers have sustainable certification Source: Authors

products rise and thus crowd out private demand, which would mean that SPP actually reduced the total sales of sustainable products (Marron, 1997).

Thus, our first working hypothesis is formulated as follows:

Hypothesis0: There is no significant correlation between firms’ participation in SPP and firms’ sales of sustainably-certified products.

Hypothesis 2 – exports

In the long term, preference for domestic (sustainable) products in public procurement could help a country build a comparative advantage, and thus increase exports of sustainable production. The participation in public procurement may enable learning and diversification processes. Firstly, public procurement has been argued to help firms – in particular young firms – to discover new markets (Ferraz, Finan, & Szerman, 2015), may provide feedback that can engender specialisation in future economic sectors (Edler & Georghiou, 2007) or may provide a “testing ground for innovative products” (Kattel & Lember, 2010). Given Costa Rica’s eco-trademark and its populations’ general openness towards sustainability, Costa Rica seems well-positioned to embrace such a developmental strategy (see Section 3).

However, in the short term, increasing domestic demand for (sustainable) products through public procurement may decrease product exports (see Trionfetti, 2000). Moreover, it is questionable whether firms’ learning (towards exporting) in public procurement actually occurs. Therefore, we derive the following null hypothesis:

Hypothesis0: There is no significant correlation between firms’ participation in PP and firms’ exports.

Hypothesis 3 – sustainable certification

The inclusion of sustainability standards as criteria to allocate public contracts may incentivise (or oblige) firms to adopt sustainability standards, and may thus help to spread them across value-chains and sectors (Uyarra et al., 2014; Blind, 2013; Brammer & Walker, 2011; see McCrudden, 2004 for historical examples). Accordingly, Hale and Roger (2014) as well as Auriol and Schilizi (2015) suggest that governments can take an active role in orchestrating the efforts of private actors towards sustainable standardisation, that is, by supporting a specific (local) certification or label. The inclusion and support for specific standards in public procurement is also argued to

signal to producers and consumers unmet needs and the direction of future economic change (Edler & Georghiou, 2007; Mazzucato, 2015; Uyarra et al., 2014). Sustainability standards put an end to “equal treatment” of procuring firms (products) that do or do not adhere to higher sustainability standards, which constitutes a “carrot” for first movers and a “stick” for unsustainable incumbents and “laggards” (Rodrik, 2004; Chang, 2002).

However, the inclusion of sustainability standards as criteria in PP involves several risks that may actually lead to a negative effect. If the costs to acquire the necessary certificate for complying with sustainability standards exceed the potential benefits, additional sustainability standards may discourage firms from participating in SPP. Secondly, governments may lack the necessary information, knowledge and capacity to select adequate sustainability standards. Governments may select too ambitious standards, which may generate oligopolies or monopolies, or too basic standards, which also do not incentivise sustainable upgrading (Blind, 2013). For example, Lundberg et al. (2015) found suggestive correlations for such an effect in the Swedish procurement of cleaning services. In their analysis, they observed that none of the purchases, for which green criteria had been established, identified which specific environmental objectives should be met. This is particularly interesting as the political ambitions to promote SPP as an environmental policy instrument are extensive.

We thus derive the following null hypothesis:

Hypothesis0: There is no significant correlation between firms’ participation in SPP and firms’ likelihood i) to possess sustainable certification and ii) request sustainability certificates from their suppliers.

Hypothesis 4 - innovation

Moreover, there may be important positive externalities to firms through their participation in (sustainable) public procurement, which could incentivise firms’ (sustainability-oriented) innovation. At the most basic level, sustainability standards in public tenders can serve as a source of information (which comes at no cost). Information equally constitutes a signal (Edler & Georghiou, 2007), which can trigger processes of self-discovery, for instance, for incremental or radical innovations, (Blind, 2013; Mazzucato, 2015), which are crucial for countries’ long-term growth (Hausmann & Rodrik, 2003).

Furthermore, SPP can help firms finance the costs of innovation, since innovations may involve risks unlikely to be covered through conventional lending (Panagariya, 2011; Andreoni & Chang, 2016; Kattel & Lamber, 2010). The government may step in as it has “the deepest pockets” (Andreoni

& Chang, 2016) and can use its procurement to ease firms’ access to credit as procurement increases firms’ valuation (Banerjee & Duflo, 2014).

Yet, there are also rationales that suggest that selling to the government may reduce firms’ innovation activity. First, governments may lack information (for an example, see Panagariya, 2011), bureaucratic capacity (for instance, Rodrik, 2004) and embedded autonomy (Evans, 1995) to choose sustainability criteria that are neither too basic nor too stringent to foster rather than stifle incentives for innovation (Blind, 2013). Second, if costs for standard adoption exceed benefits, firms may refrain from SPP. Fewer companies imply less competition, which reduces incentives for innovation (see, for instance, Lundberg et al., 2015; Aghion et al., 2005).

Although no such specific policy is in place in Costa Rica, the 2015 National Policy on SPP puts a special focus on promoting innovation. We thus formulate the hypothesis as follows:

Hypothesis0: There is no significant correlation between firms’ participation in PP and firms’ having innovated and/or firms’ share of sales from innovated products.