Exploring the credit channel of public procurement: How government contracts boost firm growth

Public procurement, accounting for a significant portion of government spending, has traditionally been viewed as a means to increase revenues for firms. However, this research uncovers a new mechanism through which government contracts fuel firm growth: enhanced access to credit. Using detailed data from Portuguese firms, the paper finds that winning procurement contracts increases firms’ ability to borrow, facilitating investments and expanding employment, particularly among smaller, financially constrained firms.

The study demonstrates that for every additional euro awarded in a procurement contract, firms experience a 7-cent increase in credit at lower interest rates. This credit channel operates by allowing firms to use the secure cash flows from government contracts as collateral, easing borrowing constraints and boosting liquidity. This mechanism becomes particularly impactful during times when traditional sources of finance might be limited, enabling firms to maintain growth and resilience.

Moreover, the effects extend beyond individual firms. At the regional level, each euro of procurement spending contributes 1.3 euros to local output, with the credit channel accounting for 5% of this impact. This insight has significant implications for policymakers aiming to stimulate the economy. By strategically using public procurement to support small and medium-sized enterprises, governments can enhance regional economic resilience and foster sustainable growth.

These findings underscore the role of public procurement as a powerful tool for economic development. By easing financial constraints through the credit channel, procurement policies not only support firms but can also contribute to broader economic stability and growth.

Click here to go to the paper by Ricardo Duque Gabriel.