Association for Public Policy Analysis & Management

The United States federal government has outsourced work abroad for decades, from its goals of international development to national defense and diplomacy. the U.S. government has an explicit foreign policy goal of improving local economic development in many of the countries where implementation of these contracts occurs. As such, agencies may prioritize awarding contracts to organizations located in the host countries as a tool to both develop local capacity and improve sustainability by promoting local buy-in and ownership. Yet, we know little about the extent to which local contractors are used accomplish these purposes. To what extent do federal agencies select domestic versus international contractors? Further, what predicts whether a contract will be given to a U.S. organization versus a local organization? Rooted in previous studies of transaction-cost economics, contract management, and foreign aid, we propose and test a theory to explain the selection of contractor origin.

Using the Federal Procurement Data System (FPDS), we analyze data on all U.S. international contracts from 2004-2017. Results demonstrate that when contracts are for higher-complexity work, and in countries with lower capacity, contract managers are more likely to select U.S. contractors. Our results indicate that when uncertainty is high, U.S. agencies are more likely to use known service providers to reduce risk. However, when the work is carried out in a country with high levels of capacity, local contractors tend to be selected. Taken together, our findings indicate that contracting official prioritize management considerations over economic development goals.