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A model assessing innovativeness of administra-tion units awarding public contracts as a tool to conduct economic policy of the state

Borowiec, Arkadiusz

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Borowiec, Arkadiusz Working Paper A model assessing innovativeness of administra-tion units awarding public contracts as a tool to conduct economic policy of the state Institute of Economic Research Working Papers, No. 25/2014 Provided in Cooperation with: Institute of Economic Research (IER), Toruń (Poland) Suggested Citation: Borowiec, Arkadiusz (2014) : A model assessing innovativeness of administration units awarding public contracts as a tool to conduct economic policy of the state, Institute of Economic Research Working Papers, No. 25/2014, Institute of Economic Research (IER), Toruń This Version is available at: https://hdl.handle.net/10419/219586 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/3.0/ Institute of Economic Research Working Papers No. 25/2014 A model assessing innovativeness of administration units awarding public contracts as a tool to conduct economic policy of the state Arkadiusz Borowiec The paper submitted to VIII th INTERNATIONAL CONFERENCE ON APPLIED ECONOMICS CONTEMPORARY ISSUES IN ECONOMY under the title MARKET OR GOVERNMENT? Institute of Economic Research and Polish Economic Society Branch in Toruń 18-19 June 18-19, 2015, Toruń, Poland Toruń, Poland 2014 © Copyright: Creative Commons Attribution 3.0 License 2 Arkadiusz Borowiec Arkadiusz Borowiec [email protected] Poznan University of Technology, Faculty of Engineering Management Chair of Economic Sciences 11 Strzelecka Str., 60-965 Poznan A model assessing innovativeness of administration units awarding public contracts as a tool to conduct economic policy of the state JEL Classification: E1, E6 Keywords: Macroeconomic Policy, Policy Making, Innovations, Public procurement Abstract: In today's market economy factors concerning knowledge, new technologies and innovative solutions are essential for economic development. However, the Polish economy, despite its high innovation potential compared to other European Union countries, is characterized by a very low level of innovativeness. Implementing this potential is conditioned with an appropriate economic policy of the state and rational approach to its resources and legal solutions. One of the possibilities of such an action is the use of public procurement instrument through which it is possible to more effectively create demand for innovative products and services. As shown by literature studies, the achievements of the subject literature associated with the creation of demand for innovations by public administration in Poland have been very modest. This gap is recognized the article and it attempts to build a model for assessing the innovativeness of these units. Network thinking methodology was used to build the model. As a result, after the identification of factors affecting the conduct of an innovative public procurement, a network of links was established between them and examined in terms of type, intensity and duration of exposure. Building a model according to the methodology, the opinions of experts have been used along with long-term observations conducted in the course of participation in all kinds of conferences and trainings. The model was also subjected to validation in two selected units. A model assessing innovativeness of administration units … 3 Introduction In recent years innovativeness has been one of the priority areas of economic policy in Poland and other EU countries. This policy, in line with the understanding of innovations as a driver of economic growth (Romer, 1986), is reflected in many documents at Community level, as well as the actions taken by the governments of many countries. However, while analyzing the position of Poland in the ranking of the EU innovativeness, it should be noted that its economy is showing a low level of this indicator and scores the fourth place from the end in comparison to the remaining EU Member States 1 . Especially worrying is the insufficient activity reported in connection with the decommissioning of the institutional barriers and the lack of adapting public institutions to the needs of entrepreneurs. It seems that there are several reasons behind a growing importance of innovations in the Polish economy. Firstly, the 20 th Century witnessed a great technological revolution - especially in the field of telecommunications and informatics. This considerably accelerated the aging process of many products and services available on the market. This situation obliges the producers to multiply their efforts to generate innovations, especially regarding products and processes, as well as rapid changes in the structure of employment. Secondly, the Polish market economy has been slowly entering a state of maturity, and after more than 22 years of operation it requires new challenges and effective actions. For this economy to be respected in the European Union efforts should be strengthened and expanded in order to accelerate its development and its competitive position should be improved as well. Thirdly, the beginning of the 21 st Century showed how much countries like India, Brazil and China to did to improve competitiveness of their economies. To maintain its position as a strong European country Poland should, therefore, take steps to maintain and perhaps strengthen its economic position. As we can see, there can be numerous motives for introducing innovations and they may involve internal and external sources (Freeman, 1994). They should focus on many aspects of economic policy, including the public procurement market, which in Poland has been growing rapidly and its estimated value amounted to approximately 8.76% of gross domestic product by 2013 (PPO, 2014, p. 27). Thus, the value of this market indicates that the analysis of creating demand for innovations through public procurement system (and thus the use of the existing potential of this system) 1 The innovative position has been determined using the Innovation Union Scoreboard 4 Arkadiusz Borowiec is a very important economic problem facing the Polish economy. Despite the lack of empirical achievements in this regard, the examples of highly developed countries show that through the effective use of existing resources and legal status (through solutions used by public administration) innovativeness of many economies could be raised. Innovative potential inherent in the system of public procurement, as well as the lack of comprehensive research on this issue, have led to an attempt to build a model for assessing the innovativeness of public administration entities awarding public contracts. This model is a proposal of the first in the literature system recognition of key factors related to public procurement, which affect the innovativeness of the Polish economy. Moreover, such an assessment can be useful for decision makers for an effective, and most importantly, fair allocation of budgetary resources to the bodies responsible for organizing legal tenders in our country, as well as comparing them to responses favoring the creation of demand for new products and services. Methodology of the research According to J. Gmurczyk, in case of such complex issues as innovativeness, system thinking seems to be almost necessary (Gmurczyk, 2014, p.32). Network thinking methodology has been used to build the model to assess the innovativeness of public administration entities involved in public procurement. As a result, after the identification of factors affecting the conduct of an innovative public procurement, a network of links has been established between them and examined in terms of type, intensity and duration of exposure. This identification was made possible as a result of discussion in a group of experts dealing with procurement on a daily basis 2 . Network thinking methodology based on the cooperation of those involved in the analysis of the problem posed in front of them, provides very objective results. In this sense it certainly deserves to be called a moral methodology. Although it takes much more time than a simple methodology of cause and effect, it also avoids the pitfalls of linear thinking and taking "shortcuts" and finding numerous unpleasant surprises. The methodology requires the use of a simple yet very precise language. Many of the concepts, definitions and problems require, therefore, the analysis and extensive consultations of participating experts. This is of great importance when it comes to a critical attitude toward the discussed problems. As stated by 2 These people form a group of 43 postgraduate students participating in the course titled "public procurement and public-private partnerships." A model assessing innovativeness of administration units … 5 A. Piekarczyk and K. Zimniewicz, the use of network thinking methodology allows us to discover the various limitations and barriers present in the decision-making process, which in the case of the provision of innovative public procurement is an extremely important issue. The construction of a model for assessing the innovativeness of Polish public administration entities awarding public contracts According to the network thinking methodology, it is necessary to illustrate the problematic situation first. For the assessment of entities purchasing innovative products and services, the problematic situation is to identify the elements included in the network of connections formed by the contract with both proximal and distant environments. Innovative public procurement had to appear in the center of the created network because the objective is to develop a model for assessing the innovativeness of public administration through the prism of public procurement contracts. This type of procurement is created by public institutions, which simultaneously constitute one of the most important stakeholders influencing the launch of the award of these contracts and through this prism it is necessary to assess entities awarding public contracts. The network of connections between the factors influencing the solution to the problem situation is shown in Figure 1. The next step should be to analyze the interrelationships between the various factors in the network in accordance with the adopted network thinking methodology. From a point of view of impacts, isotropic (prefix +) and opposite (sign−) interactions have been assumed. These designations, however, have not been provided in the figure due to their low readability. The next step in the analysis of network thinking is to create an influence matrix (Table 1). For this purpose it is worth using a spreadsheet, where the individual rows and columns are included in the value of the intensity of interactions between factors. Then it is necessary to add up the rows and columns that show activity (sum of A) and reactivity (sum of P). 6 Arkadiusz Borowiec FIGURE 1. A network of factors influencing innovative public procurements Source: own study High values obtained in the "sum A" column mean that the factor has a strong impact on other factors, while low values mean that its influence is small. High values obtained in the line "the sum of P" mean that the factor Innovative public procurement The number of cases in DPS Business institutions Number of appeals Bureaucracy The number of proenviron- mental Grey economy R & D activities Ppressure groups Access to the electronic platform Legislation Professional competence The number of electronic auctions The number of electronic biddings The number of trainings received by officials Entrepreneurship The number of SMEs winning tenders Number of PPP investments Readiness for innovation Trust Social competence Corruption Media The number of SMEs interested in tende r- Unit’s budget Subsidies The number of cases in negotiation modes Human capital The number of competitions The European Union A model assessing innovativeness of administration units … 7 was heavily influenced, and low mean that it is subject to a weak influence of other factors. Table 1. The matrix of influence 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 sum of A 1 x 2 0 0 0 0 0 0 0 0 0 3 0 0 0 2 0 0 2 0 0 0 0 0 0 0 2 0 1 1 13 2 3 x 3 0 0 0 0 0 0 0 0 0 0 0 0 0 1 3 0 2 0 0 0 0 0 3 0 3 3 0 21 3 3 0 x 0 0 0 0 0 0 0 0 3 0 3 0 0 3 0 0 0 0 0 0 0 0 0 0 0 3 0 15 4 3 0 0 x 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 0 9 5 3 0 0 0 x 2 0 3 3 0 0 3 0 3 0 0 2 2 0 3 3 1 3 3 0 0 1 0 3 0 38 6 3 0 0 0 0 x 0 3 3 0 0 3 0 3 0 0 0 0 0 2 3 0 3 3 0 0 1 0 3 0 30 7 3 0 0 0 0 0 x 3 0 0 2 2 0 0 0 0 0 0 0 0 0 3 2 0 0 0 0 3 3 0 21 8 2 3 3 0 2 2 2 x 0 1 0 2 0 2 0 2 3 2 3 0 0 0 0 3 0 0 0 0 2 0 34 9 0 0 0 0 3 3 0 1 x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 9 10 0 0 0 0 0 0 0 0 0 x 0 2 0 0 0 0 2 3 0 0 2 0 0 0 0 0 3 2 2 0 16 11 0 0 1 0 2 1 2 1 0 0 x 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 11 12 2 2 0 0 0 0 3 0 0 3 1 x 0 0 0 3 3 0 0 0 0 0 0 0 3 3 0 0 0 0 23 13 0 0 0 0 0 0 0 0 0 0 2 3 x 0 0 0 0 2 0 0 0 0 2 0 0 0 0 0 0 0 9 14 3 0 0 2 1 2 0 0 0 0 0 2 0 x 0 0 0 0 0 3 3 0 0 0 0 0 0 0 0 0 16 15 0 0 0 0 0 0 1 0 0 1 1 0 0 1 x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 16 3 0 0 0 0 0 0 0 0 2 0 3 0 0 0 x 0 0 0 0 0 0 0 0 2 0 2 0 0 0 12 17 2 0 0 0 0 0 0 0 0 3 0 0 0 0 3 0 x 2 0 0 3 3 0 0 0 0 2 2 0 0 20 18 0 1 0 0 0 0 0 0 0 0 0 0 0 0 3 0 3 x 0 0 0 0 0 0 0 0 0 0 0 0 7 19 2 0 0 0 2 0 0 0 0 1 0 0 0 0 2 3 1 2 x 0 0 0 0 0 0 2 0 0 3 0 18 20 2 3 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 x 3 0 0 0 0 0 0 0 0 0 10 21 0 0 0 0 2 2 0 2 0 0 0 0 0 0 0 0 0 0 0 0 x 0 3 0 3 0 0 0 0 0 12 22 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 x 3 0 0 2 0 1 0 0 9 23 0 3 3 0 0 0 0 0 0 0 0 2 0 3 0 0 0 0 0 3 0 0 x 3 3 0 3 0 0 0 23 24 2 0 0 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 x 0 0 0 0 3 0 7 25 3 0 0 0 0 0 3 0 0 0 0 0 0 3 0 2 0 0 0 0 2 0 2 0 x 0 0 0 0 0 15 26 3 3 3 3 3 3 3 0 0 0 0 3 0 0 0 0 0 0 2 0 0 2 0 3 2 x 3 3 0 0 39 27 3 3 3 0 2 2 0 0 0 0 0 3 0 0 2 2 1 0 0 0 0 0 0 3 0 3 x 0 0 0 27 28 0 3 3 3 3 3 3 0 0 2 0 0 0 0 0 0 0 0 0 0 0 1 3 3 3 3 3 x 0 0 36 29 0 2 3 2 2 2 3 0 2 0 0 0 0 0 0 2 0 0 3 0 0 0 0 0 0 3 0 0 X 0 24 30 2 0 0 0 0 0 0 3 0 0 0 3 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 x 11 the sum of P 47 26 22 10 22 22 20 16 8 13 6 39 2 26 10 16 19 16 10 13 21 10 21 21 16 19 20 14 31 3 Source: own study The matrix of influence is an indispensable tool for the preparation of the so-called intensity maps. After its creation, it is possible to determine which of the previously separate factors are active, critical, passive or lazy. 8 Arkadiusz Borowiec From the point of view of the construction of a model (for assessing the innovativeness of public administration awarding public contracts) for further analysis only those factors will be admitted that constitute the two first-mentioned groups. Intensity maps (Figure 2) is a two-dimensional graph wherein the values for the activity of a factor have been placed on the horizontal axis, while those regarding reactivity - on the vertical axis. Figure 2. Intensity map 0 5 10 15 20 25 30 35 40 45 50 0 5 10 15 20 25 30 35 40 45 Source: own study It is very important to objectively lead the verge of splitting between the categories of factors obtained in the matrix of influence, in order to identify active, critical, passive and lazy factors. It is assumed that the dividing lines will extend in places that are formed by dividing the maximum value of A and P by 2. Thus obtained values are A = 19.5 and P = 23.5. On the basis of the intensity maps it is possibly to finally emerge active, critical, passive and lazy factors. Table 2 shows the distribution of these factors along with the values for the activity and reactivity. Table 2. Summary of factors affecting the implementation of innovative public procurement 4 1 2 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Passive factors Lazy factors Critical factors Active factors Reactivity (P) Activity (A) A model assessing innovativeness of administration units … 15 • for the number of trainings for authorities 7063=1•9•4•1•8•9 6 ,. The next step in determining the weights of factors included in the model for the assessment of innovativeness of public administration units awarding public contracts is summing these values: 0,283+0,445+3,706+1,399+0,413+3,706 = 9,952 Calculating the sum allows for the calculation of optimal percentage weights for the factors included in the model: • the number of PPP investments: (0,283 / 9,952) 100% = 2,84%, • the unit's budget: (0,445 / 9,952) 100% = 4,47%, • the number of electronic biddings: (3,706 / 9,952) 100% = 37,24% , • the number of electronic auctions: (1,399 / 9,952) 100% = 14,06%, • the number of pro-environmental contracts: (0,413 / 9,952) 100% = 4,15% • the number of trainings for authorities: (3,706 / 9,952) 100% = 37,24% . Having determined the percentage weight of each factor included in the model, we can proceed to its presentation. Its final form has been shown in Table 8. Table 8. Model for assessing the innovativeness of Polish public administration entities awarding public contracts Factor The method of calculation (a) Weight (b) The result (a x b) [%] The number of PPP investments the number of orders leading to contracts in the form of PPP / total number of cases 2,84% ___ x 2,84% = ___ The unit's budget the amount of the expenses associated with the purchase of innovative procurement / total 4,47% ___ x 4,47% = ___ 16 Arkadiusz Borowiec public procurement expenditure The number of electronic biddings the number of cases in the electronic bidding / total number of cases 37.24% ___ x 37.24% = ___ The number of electronic auctions the number of cases using electronic auction / total number of cases 14.06% ___ x 14.06% = ___ The number of proenvironmental contracts the number of cases with proenvironmental criteria / total number of cases 4.15% ___ x 4.15% = ___ The number of trainings received by authorities the number of trainings related to innovative public procurement / total number of trainings received by employees 37.24% ___ x 37.24% = ___ the sum of innovativeness Source: own study As regards the interpretation of the results obtained from the use of the model, it looks as follows: • the results in the range of 100% - 76% - the highest innovativeness, • the results in a range of 75% - 51% - high innovativeness, • the results in the range of 50% - 26% - moderate innovativeness, • the results in the range of 25% - 0% - low level of innovativeness. Such a division is supported primarily by the European Union guidelines, which (for example in the field of green public procurement) planned to obtain the number of 50% of cases by the end of 2010. It is recommended to carry out the calculations associated with the use of the model on an annual basis by comparing the results with those of the previous year. This will provide an opportunity to indicate the direction of changes in the development of innovativeness in the analyzed entities awarding public contracts. Since each model should be validated, also in this case the two units of public administration got their innovativeness indicators calculated. These entities were local government bodies performing similar functions in Poland and Germany 3 . The data were obtained during an interview conducted with the leadership of departments responsible for public procurement and on the basis of data collected by the audited entities. The obtained results are shown in Table 9. Table 9. The use of the model to assess innovativeness in the selected units of public administration Factor Polish Unit German Unit Ratio Weight Result Ratio Weight Result LIP PP 0 2.84% 0% 0.03 2.84% 0.08% 3 The validation was conducted during the research internship in Germany. A model assessing innovativeness of administration units … 17 BJ 0.08 4.47% 0.36% 0.22 4.47% 0.98% LLE 0.031 37.24% 1.15% 0.23 37.24% 8.56% LAE 0.076 14.06% 1.07% 0.17 14.06% 2.39% LZP 0.006 4.15% 0.02% 0.24 4.15% 1.00% LSZ 0.12 37.24% 4.47% 0.51 37.24% 18.99% Total Innovativeness 7.07% 32% Source: own study based on test results. As indicated by the data obtained on the basis of the research on public administration in Poland and Germany, the native unit belongs to institutions that create low innovativeness, while the German one to those of moderate innovativeness. In both cases, there is a visible distance that has to be covered to catch up with the guidelines of the European Union. In fact, in the use of all the factors that create innovativeness, the Polish unit is still lagging behind its German counterpart. The largest differences can be seen especially in the use of green public procurement (the Polish unit generates only 0.6% compared to 24% on the German side), the number of electronic auctions (3.1% and 23% of cases respectively), and the number of trainings received by authorities characterized by issues related to the factors included in the model (12% and 51% respectively). The Polish example shows how much still remains to be done in terms of utilization of the factors that create demand for innovative procurement and how big distance separates our country from our western neighbors regarding work on improving the innovativeness of the entire national economy. Conclusions The resulting model can play an important role in economic policymaking related to the allocation of state funds to the state administration entities throughout the country. In such application, it can also act as an incentive function of these units because the results obtained in terms of innovativeness may influence future revenues associated with the development of regions or investment for local communities. The annual assessment conducted by the entity or by a system that allows the introduction of online data will also allow the determination of the average level of innovativeness in public administration units dealing with procurement in the entire country. Undoubtedly, it is important in this area to take appropriate legislative action, because as foreign experiences shows, only quick and efficient calculation of the rate of innovativeness allows for an appropriate use of the model. Therefore, its use is simplified to the maximum and does not require multiple procedures. 18 Arkadiusz Borowiec The model should also be applied to the micro level, because each unit of public administration can use it to monitor their progress in the purchase of more modern supplies, services and construction works. It is also of major importance in the use of electronic tools and the so-called green public procurement, whose weight is not large, but can be decisive in a situation when public entities maximize the number of trainings and the use of electronic tools. Finally, we should mention the fundamental principle of economics associated with the use of the model. Using it ensures optimal results with the utilization of given resources. For example, it is difficult to imagine that while using the model, the money received by entities would be allocated to the trainings of employees not related to raising awareness on creating demand for innovative public procurement. This solution also seems to be a kind of a remedy for the lack of knowledge of contracting in the area related to negotiating procurement modes and the procedures of public-private partnerships. The use of public-private partnership forced by the model is linked to another macroeconomic benefit. The use of this tool provides significant relief for the state budget expenditures related to the development of infrastructure and public services by replacing public capital with the private one. The benefits obtained this way can also translate into the desired concentration on the entire lifecycle of a given project, as in the case of proceedings conducted in the PPP efficiency and effectiveness formula, which are not counted for in the individual stages, but in relation to the total integrated cost throughout the lifecycle of the project. Finally, the big advantage associated with the launch of PPP in Poland on a larger scale is the acceleration and improvement of the efficiency of project implementation. This is just an example of the benefits associated with the use of this tool. The use of the model can also help to change the attitude of authorities in the field of environmental protection. Awarding these contracts and the associated influx of budgetary funds resulting from an increased innovativeness of certain units can successfully compensate for the often higher expenses they incur in connection with the purchase of green products and services. Ultimately, there is also a chance to change the image of public administration. There is a still lingering notion that it is outdated and does not pass on good practices in the area of creating demand for innovative products and services to the private sector. It is worth mentioning that this change may lead to a greater confidence of citizens in these units as well as the entire economic system of the state. A model assessing innovativeness of administration units … 19 Analyzing the importance of the manageable factors in the presented model, we can get an impression that only two of them dominate (the number of electronic biddings and the number of trainings received by authorities). In fact, these factors (given the results) seem to be crucial in conjunction with the next phase of network thinking methodology associated with the planning of strategies and actions. They provide the launch of processes associated with the use of electronic tools, which (as indicated by numerous examples) allow for huge savings of budgetary funds (which can be used for the purchase of modern products and services), as well as the efficient use of public funds for training of employees of public administration in Poland. Therefore, they essentially play a huge economic role as they allow obtaining significant savings not only in the administration of public institutions, but also in the entire state budget. The model also carries certain limitations. Not every tender procedure can be carried out using the formula of public-private partnerships or as electronic bidding. The legislature has imposed limitations and only some of the proceedings can be realized in this way. It is also difficult to expect that the staff of the unit providing public contracts will be trained in the use of only the procedures associated with obtaining innovative products and services in public tenders. There exists a whole range of other activities that require the improvement of knowledge such as formulating the terms of reference, selecting criteria and procedures for evaluating an offer or judicial appeal proceedings that do not involve raising innovative procedures, but are necessary for the smooth functioning of individuals. Moreover, not all procurements have their ecological equivalents. Also, it is not always possible to analyze the balance of benefits and costs associated with them and maintain their green nature. A threat to the use of the model can also lie in the so called "rat race" between public authorities striving for the greatest proportion of the budget regarding expenses related to tenders. This may result, among other things, in management trying to enforce participation in trainings on employees - withdrawing them from their daily duties and causing backlogs in the current work. It is worth mentioning that the created model does not provide guidelines for creating innovations on the supply side of public procurement market. As we know innovation-oriented companies may find the problems that P.M. Simpson divided into four categories: too many changes for the sake of change, market risk, hostile attitude of the staff or an increase in costs (Simpson, Siguaw, Enz, 2006). Innovativeness of companies of different sizes may also be influenced by various factors such as, for example, the structure of the market (Audretsch, 1995), (Malerba, Orsenigo, 1996). 20 Arkadiusz Borowiec These facts mean that in the future, it will be necessary to undertake a study on the construction of a model for assessing the innovativeness of enterprises participating in the public procurement market. References Audretsch D.B.(1995), The Propensity to Exit and Innovation, Review of Industrial Organization. http://dx.doi.org/10.1007/BF01026884 Borowiec A. (2008). 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