Association for Public Policy Analysis & Management

Public sector contracts are not simply a tool to increase efficiency; they can also serve to promote other public values.  Procurement policies that target specialized groups, such as small businesses, minority-owned, or women-owned firms, are designed to promote equity and representativeness.  Yet procurement policy and regulation favoring small businesses may restrict competition and contribute to weakly competitive procurements, thereby limiting the range of cost, quality, and delivery options for goods and services procured by public agencies (Girth, Hefetz, Johnston and Warner 2012; Brown 2007).  When markets are constrained, purchasers have fewer choices to balance different, and sometimes competing, purchasing goals (Brown, et al. 2013; Johnston and Girth 2012).  Despite the prevalence and importance of inclusion policies in federal procurement, very little is known about the design or impact of these programs on purchasing agencies or the supplier market.

In this paper we examine the federal small business set aside program and assess the impact of small business set asides on supplier competitiveness, program participation, and firm growth.  Specifically, we investigate the following questions: To what extent do small businesses utilize the federal set aside program and what are the effects of their participation?  What factors contribute to firm growth and successful emergence out of the small business program?  To answer these questions we track the performance of 1,000 small businesses over a 10-year period (FY2005-FY2014).  The sample is created by randomly selecting 600 firms with small business set aside contracts in 2005 with the Department of Defense (DOD) and 400 firms with small business set aside contracts in 2005 with civilian agencies.  The sample includes firms with contracts for products varying in complexity, from simple product procurements to more complex services contracts (e.g., IT systems).  We track these firms annually for 10 years to account for a) firm attributes (revenue growth, capital, firm size, etc.) and b) contract-specific attributes, to include the value of federal prime contracts the vendor holds. Contracts data is obtained from the Federal Procurement Data System-Next Generation (FPDS-NG) and firm-level data is acquired from Dun & Bradstreet.

Our study examines the supply-side of public procurement, building on extant literature undertaken in developing and testing theories of the demand-side of public procurement. We postulate that there are unique drivers for firms that emerge into the middle market because the incentives are so strong to remain a small business, even if that means stymied growth. We also expect that firms that successfully transition out of the small business market have unique ways of overcoming the “benefit cliff” they encounter as they grow.  The results of the proposed study will provide a critical first step in capturing the structural dynamics involved in the design, implementation, and evaluation of competitive practices in federal agencies aimed at promoting small business participation and growth.