The UK government spends around £400 billion a year buying goods and services, a far bigger slice of public spending than goes to research and development. To support the new industrial strategy, procurement needs to be designed and directed in a way that drives innovation, diffusion and growth.
Public procurement can be a powerful tool for the UK’s new industrial strategy – but it is not yet working as one. This is not a marginal policy lever: across the OECD, public procurement accounts for around 13% of GDP and about one-third of total government expenditure; in the UK, it amounts to around £400 billion a year.
Figure 1: Government procurement spending as a share of GDP, OECD countries, 2024
Source: OECD
Too often, public buying fails to reach innovative, high-growth firms. Tenders are designed in ways that favour incumbents or suppress innovation through over-specified requirements. And markets are engaged too late to shape what gets procured, thus limiting the opportunity to test and scale new ideas.
Closing the gap between ambition and practice requires deliberate investment in measurement and a better understanding of the problem to solve, procurement design and the institutional infrastructure that supports public buyers.
What does research tell us about how procurement influences innovation?
The case for using public procurement to drive innovation is not new:
- In the 1980s, it was framed as an industrial policy question: how governments could use procurement in defence, health and space to build strategic industries.
- In the 1990s, it became a European competitiveness question, linked to concerns about whether European firms could keep pace with American and Japanese competitors in technology-intensive sectors.
- In the 2000s, it broadened into a horizontal tool available to public buyers across sectors.
- In the 2010s, it was reframed through mission-oriented policy, asking how procurement could help to address social challenges such as sustainability.
- Today, procurement is again central to debates on industrial strategy, social value, economic security and European competitiveness. The case has been made repeatedly; the challenge is implementation at scale.
Public procurement can shape the size, sophistication and direction of demand for innovation. Large and credible public demand can reduce uncertainty, absorb early stage risk and signal that investment will be rewarded.
Public buyers can also legitimise new technologies, support diffusion through standards and influence market structure through decisions about contract size, length and participation conditions. Winning a first public contract can have a reputational effect that is more valuable to a firm than another grant for research and development (R&D), because it signals credibility to private investors and other potential customers.
The empirical evidence has strengthened over time. Studies find positive effects on product and process innovation, R&D investment and patenting, with effects often stronger than comparable supply-side instruments and amplified when procurement is combined with R&D support (Edler and Georghiou, 2007; Uyarra and Flanagan, 2010; Guerzoni and Raiteri, 2015; Kundu et al, 2025).
The gains are particularly important for high-growth small and medium-sized enterprises (SMEs), financially constrained firms and firms in less developed regions.
But the effects are not automatic, and poorly designed tenders can suppress innovation. Price-only tendering discourages new product development, while over-specified criteria can lead firms to innovate only up to the standard required, rather than beyond it (Krieger et al, 2024; Chiappinelli et al, 2025).
This means that procurement should be judged not only by how much government spends, but by how that spending is designed and which firms and places it reaches.
Whom does procurement reach – and does geography matter?
Recent UK evidence suggests that scale-ups and high-growth SMEs – which are often the most innovative firms in the economy – are significantly under-represented in public procurement markets (ScaleUp Institute, 2025). They win a disproportionately small share of contracts and face greater barriers compared with larger, more established suppliers.
If procurement systematically misses the firms with the strongest growth potential, it weakens one of the industrial strategy’s main routes to productivity growth (House of Lords Science and Technology Committee, 2025).
In defence, one of eight sectors identified as ‘growth-driving’ and where the government is the dominant buyer, just 4% of Ministry of Defence (MOD) direct expenditure reaches SMEs, and eight of the top ten suppliers by expenditure in 2024/25 were also in the top ten a decade earlier (Industrial Strategy Advisory Council, ISAC, 2026).
One defence SME, despite being backed by major European venture capital funds and demonstrating strong technical capability, was disqualified from an invitation-only tender because its turnover as a growth stage company did not meet the financial threshold required (ISAC, 2026).
Geography compounds the problem. Around two-thirds of UK procurement spending is controlled by central government, and the spending that reaches innovative firms is heavily concentrated in London and the South East (Uyarra and Shah, 2025).
Similarly, the UK Innovation Report 2026 shows that high-value start-ups remain strongly concentrated in London. Procurement therefore risks reinforcing existing spatial patterns of innovation and growth, rather than helping to broaden them.
A strategy committed to spreading growth across the UK’s regions needs procurement policy that is explicitly place-sensitive, not merely formally open to all suppliers (House of Lords Science and Technology Committee, 2025).
That means using procurement data to understand where public spending flows, where innovative firms are located and which regions are being missed; publishing pipelines that allow firms outside London and the South East to prepare; and designing contracts so that smaller and high-growth firms can compete. With devolution, it also means giving combined authorities, anchor institutions and local public bodies the analytical capability to align procurement with regional innovation strengths and growth priorities.
A further issue is scale. Innovations procured through public contracts often remain isolated pilots rather than being diffused and replicated across public organisations. In those cases, the public sector may learn from experimentation, but the market for the innovation does not develop.
Recent research illustrates how public buyers can support scaling by acting as reference customers, aggregating fragmented demand and shaping standards or markets – but these effects require coordination across buyers and institutions. (Merisalo et al, 2026).
An illustration is Transport for London’s (TfL) Innovation Hub: set up in 2017, the hub matched procurement mechanisms to different scaling problems, using innovation partnerships, franchising requirements and collaboration frameworks to test, adapt and scale new solutions. Each route gave TfL a way to test technology that it could never have specified through a conventional tender, while giving suppliers a credible public reference and a genuine path to scale rather than a one-off pilot.
Why is state capacity the binding constraint?
The persistent gap between procurement ambition and practice points to a problem of state capacity. The issue is not simply whether public buyers are allowed to procure differently, but whether they have the skills, confidence, incentives and organisational routines and culture to do so.
Studies of public procurement capability show that innovation procurement depends on ordinary capabilities, such as commercial and technical skills; dynamic capabilities, such as the ability to learn from markets and adapt procurement approaches; and functional capabilities, such as using procurement to support wider policy goals (Grimbert et al, 2024).
One study shows that practices that are most likely to stimulate innovation are often the least embedded in the UK: engaging markets at an early stage before tenders are issued; specifying desired outcomes rather than detailed solutions; managing risk through dialogue rather than avoidance; giving suppliers useful feedback; and building longer-term relationships rather than treating each contract as a one-off transaction (Georghiou et al, 2014).
A 2026 Competition and Markets Authority study of civil engineering procurement finds that despite established guidance, early market engagement remains inconsistent, price criteria often dominate quality and public authority capacity constraints limit the ability to procure innovatively. The report even puts a figure on the cost: around £19 billion a year is spent on public road and rail infrastructure, and better scoping, planning and procurement practice could unlock efficiency savings of up to £5 billion a year.
In defence, a risk-averse culture, fragmented budget authority and repeated reassurance requirements create a structural ‘valley of death’ between pilots and scaled adoption, even when capability has been demonstrated and operational demand exists (ISAC, 2026).
The Procurement Act 2023 gives buyers more flexibility through provisions such as the competitive flexible procedure and a shift from the ‘most economically advantageous tender’ to the ‘most advantageous tender’, allowing wider public value to be considered. But flexibility is not the same as capability.
The binding constraint is organisational, behavioural and cultural (Uyarra et al, 2014): whether public bodies – at different levels – have the confidence, resources and institutional support to use the law strategically.
What would it take to close the gap?
Three things stand out from the evidence.
Data and transparency
Government cannot use procurement strategically if it cannot see what is being bought, by whom, from whom, under what criteria and with what outcomes. Better procurement data would make it possible to track whether public spending is supporting innovation, SME participation, regional growth and high-quality jobs. It would also lower information barriers for potential disruptors by giving them clearer signals about future demand.
This means improving the quality and linkability of buyer and supplier data, publishing more procurement pipelines, and reporting award criteria in a structured way so that innovation and wider objectives can be monitored rather than merely asserted (ISAC, 2026).
The Procurement Act's new transparency obligations and the UK Innovation Survey 2026, which for the first time asks firms about innovation undertaken as part of public contracts, create an opportunity to begin to build this evidence base, but only if investment in analytical capacity follows.
Procurement design
Public buyers need to move from prescriptive specifications towards outcome-based approaches that define the problem to be solved rather than the solution to be purchased. They also need selection and award criteria that do not systematically exclude younger or smaller firms through excessive financial thresholds, insurance requirements, intellectual property requirements, rigid past performance requirements or contract sizes that only large incumbents can absorb.
These are not minor technical details. They shape who can compete, what kinds of solutions are offered and whether procurement reinforces existing markets or opens space for innovation.
The Transreport example shows what outcome-based design can unlock: the Department for Transport’s SBRI (Small Business Research Initiative) competition defined the problem – removing barriers that disabled and older passengers faced when booking assistance – rather than specifying a system to buy.
Transreport used development funding to build a prototype with disabled passengers’ input, and the first contract gave Transreport the credibility to keep developing the product, which was then rolled out across every train company in Great Britain. The service is now used to arrange assistance for millions of journeys a year, and the rail regulator recorded a 10% uplift in disabled passengers’ satisfaction with the service.
Institutional infrastructure
International experience, including in Finland, Galicia and the Netherlands, suggests that progress also relies on competence centres and intermediary organisations that sit between public buyers, policy-makers and innovative suppliers. These bodies help to translate policy goals into procurable challenges, support market engagement, share templates and evidence, and build confidence among buyers.
Galicia, in north-west Spain, offers an instructive regional example of how its innovation agency helps to support and build procurement capacity to stimulate innovative solutions for public sector challenges (Uyarra et al, 2020).
The UK has begun to develop this function through initiatives such as the Innovation Procurement Empowerment Centre. But the question is whether these efforts have the scale, mandate and long-term funding to match the government’s ambitions.
In order to make procurement an innovation lever, the task is now is to make it measurable, problem-led and institutionally supported enough to turn demand into innovation, diffusion and growth.
Where can I find out more?
- Public procurement and regional development in the UK: 2025 research brief by Elvira Uyarra and Rikesh Shah.
- Flying blind? Innovation, growth and the regions: 2026 report House of Lords Science and Technology Committee.
- UK innovation report 2026: Publication from Cambridge Industrial Innovation Policy.
- Unlocking the potential of disruptive businesses to boost growth in the UK: 2026 report from the Industrial Strategy Advisory Council.
- Powering the scaleup economy: the 2025 ScaleUp Institute annual review 2025.
- Civil engineering market study: Competition and Markets Authority investigation of the supply of railway and public road infrastructure by the civil engineering sector.
Who are experts on this question?
- Manchester Institute of Innovation Research, University of Manchester: Jakob Edler, Luke Georghiou, Elvira Uyarra, Kieron Flanagan.
- Bastian Krieger, ZEW — Leibniz Centre for European Economic Research, Germany
- Kostas Selviaridis, Lancaster University Management School
- Jon Mikel Zabala-Iturriagagoitia, University of Deusto.
- Matti Pihlajamaa, Ville Valovirta, VTT, Finland
- Pelle Berkhout, Anne Rainville, Ruben Nicolas, Fredo Schotanus, Utrecht University
- Marianna Mazzucato and Rainer Kattel, UCL IIPP.
Author: Elvira Uyarra
Acknowledgement
This article was informed in part by discussions at the fourth Manchester IPEC Symposium on Public Procurement of Innovation (Alliance Manchester Business School, 28 April 2026), which brought together academics, policy-makers and practitioners from across the UK and Europe. The author acknowledges helpful comments and case study inputs from Rikesh Shah.
