Public Procurement and Firms : Evidence from Kenya

How important is government business to the private sector in developing economies? This paper uses administrative tax data on firm-to-firm transactions in Kenya to examine the effects of becoming a government contractor on firm performance. Using an event study design, the paper documents significant gains from becoming a supplier to a government entity. Four years later, beneficiary firms experience a 27 percent increase in productivity and employ 10 percent more. These effects are somewhat comparable to the gains from joining a multinational supply chain. Beneficiary firms also expand their trading networks to other private firms. Relaxing credit constraints and improving resilience to shocks are likely operative channels of impact. These findings highlight the potential welfare gains from improving efficiency in public procurement.