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Small Business Economics

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30-05-2023 | Research article

A by-product of big government: the attenuating role of public procurement for the effectiveness of grants-based entrepreneurship policy

Authors: Peter Grajzl, Stjepan Srhoj, Jaka Cepec, Barbara Mörec

Published in: Small Business Economics | Issue 3/2024

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Abstract

We study the contextual role of public procurement for the effectiveness of grants-based entrepreneurship policy. Drawing on the resource-based view of the firm, we argue that partaking in procurement can erode grant effectiveness by relaxing a firm’s preexisting financial constraints and diverting managerial attention away from market-centered resource configurations. To test our hypothesis, we use detailed firm-level data from Slovenia and combine matching with difference-in-differences. When firms are not involved in procurement, all investigated types of grants meet the intended policy goals, apart from productivity growth. In contrast, when firms participate in procurement, small-business grants exhibit generally weaker effects, R&D grants fail to have any impact, and employment grants lastingly reduce firm productivity. Given that public procurement occupies a large footprint in many economies, our analysis highlights an unintended adverse by-product of big government and underscores the limits of state capitalism.

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As we stress in Section 5.3, we have verified that none of our qualitative findings changes if we instead transform each of the applicable variables by applying the inverse hyperbolic sine.

We have verified that our qualitative findings are robust to redefining firms as involved in public procurement if they respectively receive any positive amount of public procurement payments and public procurement payments amounting to at least 10% of gross sales, respectively.

For all logged outcome variables, we refer to the growth effects as implied by the direct computation of the ATET. A more accurate set of point estimates would exponentiate the ATET estimates, an approach that would generally imply even larger effects.

For example, consider R&D grants in the presence of firm involvement in procurement, where we find no enduring effects on any of the outcomes (see Table 6, part B). With significance level and power respectively set equal to 0.05 and 0.80, for outcomes such as sales growth and employment growth, the minimum sample size needed to uncover the effects of analogous size to those detected in the absence of firm involvement in procurement (Table 6, part A) is no greater than 68, whereas we use 206 (treated and control) observations. A complete set of findings based on our power analysis is available upon request.

For brevity, we do not present the complete set of the corresponding estimation results, but rather merely summarize our key findings. Full results are available upon request.

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Title: A by-product of big government: the attenuating role of public procurement for the effectiveness of grants-based entrepreneurship policy
Authors: Peter Grajzl
Stjepan Srhoj
Jaka Cepec
Barbara Mörec
Publication date: 30-05-2023
Publisher: Springer US
Published in: Small Business Economics / Issue 3/2024
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-023-00788-w

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