Should SMEs pursue public procurement to improve innovative performance?

While public procurement is an efficient demand-side policy instrument, resource constraints impede small and medium-sized enterprises from accessing innovation procurement contracts. As a remedy, inter-organizational networks are seen as a means to extend SMEs' resources. This paper examines the relationship between inter-organizational networks and SMEs' innovative performance. It investigates how this relationship is mediated by the public or private sector customer's demand for new or significantly improved products. We find that networks involving other firms are associated with SMEs' innovative performance, and that this is mediated by both customer types. Furthermore, the public procurement of innovations is associated with greater returns in the case of the new products or services. For significantly improved products or services, networks involving other firms may improve performance when the demand originates from private sector customers. Our results suggest that SMEs should emphasize networks with other firms rather than public or private research and development actors when they develop new products for the public sector. These innovations can be further developed, providing opportunities for further leverage in private sector markets.