Letting Luck Decide: Government Procurement and the Growth of Small Firms

Abstract

I

estimate the causal effects of demand shocks, stemming from government procurement, on the growth of small firms in Ecuador. I assemble a unique dataset using several new administrative sources and, as identification strategy, exploit a governmental procurement process that allocates public contracts through a randomised contest. I find a positive and significant effect of demand shocks on firm growth. On average, an increase in demand of 10 per cent will increase wage expenses and fixed assets by approximately 5 per cent during the year of the shock. I also find no evidence of spillover effects from demand shocks on sales to the public or private sector. Finally, as in other studies, I show that demand positively impacts firm growth but, contrary to other findings, this effect is temporary and only observed during the year of the shock.

Acknowledgements

I am grateful to Miguel Acosta, José Almeida, Javier Brugés, Matteo Cervellatti, Alberto Dahik, Claudio Ferraz, Margherita Fort, Javier Redin Mideros, Lucio Picci, Ljubitca Quijano, Juan Sastre, Emanuela Spoeala, Rommel Tejada, and various seminar participants at the University of Bologna, the 2018 Nordic Conference on Development Economics, and the Facultad Latinoamericana de Ciencias Sociales (FLACSO). I would like to thank the research department at the Servicio Nacional de Contratación Pública (SERCOP) of Ecuador for their support during the project. Finally, I would like to thank the research assistants that helped in the data entry process.

Disclosure statement

No potential conflict of interest was reported by the author. The views expressed herein are those of the author and do not necessarily reflect those of the OECD or of its member countries.

Data availability statement

The data that support the findings of this study are available at http://www.milenkofadic.com in the research section.

Supplementary Material

Supplementary Materials are available for this article which can be accessed via the online version of this journal available at https://doi.org/10.1080/00220388.2019.1666979

Notes

1. www.compraspublicas.gob.ec.

2. Each project must be approved in the government budgetary process. This process is done during the previous fiscal year.

3. A potential concern is the committee’s discretion to qualify providers. A committee might try to provide preferential treatment to a firm by being stringent in their review of other firms and thus limiting the number of qualified providers. To overcome this potential limitation, I exclude from the sample a firm if, during any contest, it was the only one qualified into the pool.

4. All values are obtained from firms’ balance sheet documents, as reported to the tax authority (Servicio de Rentas Internas).

5. According to SERCOP, A micro firm has between 1 and 9 employees and gross sales and assets of less than $100,000. A small firm has between 10 and 49 employees and sales and assets between $100,000 and 1 million dollars. A medium firm has between 50 and 99 employees and sales between 1 and 2 million dollars.

6. For revenues I use total sales; for wages, I use the total expenditure on salaries, wages, and commissions; for fixed and current assets I use the definition as stated in the International Financial Reporting Standards (IFRS).

Additional information

Funding

The author declares that this research was funded by a graduate scholarship provided by the Department of Economics of the University of Bologna.