This paper investigates industry-level effects of government purchasing behavior. First, we try to shed light on the transition mechanism for government demand on the economy. Therefore, we construct a Schumpeterian growth model in which demand from the public sphere can effectively alter the economy’s rate of technological change. We incorporate results of various empirical studies arguing that public sector purchases acts as incentive for private innovation activities. In contrast to the standard Schumpeterian growth framework, we account for industry heterogeneity in terms of innovation potential. This extension allows bringing government demand policy within the realm of the innovation policy debate. By varying the composition of its purchases, the government can induce a reallocation of private resources to stimulate R&D and, with it, the rate of technological change. We test the model's predictions empirically for the U.S. using a unique dataset that matches industry-specific government purchases for the period 1999-2007 to business R&D. Our preliminary results offer tentative support for the hypothesis that federal procurement spending stimulates company R&D activity.