Firms in (Green) Public Procurement: Financial Strength Indicators’ Impact on Contract Awards and Its Repercussion on Financial Strength

Abstract

We examine whether the financial strength of companies, in particular, small and medium-sized enterprises (SMEs) is causally linked to the award of a public procurement contract (PP), especially in the environmentally friendly "green" area (GPP). For this purpose, we build a combined procurement company data set from the Tenders Electronic Daily (TED) and the SME database AMADEUS, which includes ten European countries. First, we apply probit models to investigate whether the probability of winning the public tender depends on the company's financial strength. We then use the Flexpanel DiD approach to investigate the question of whether the award has an impact on the future financial strength of the successful company. On the one hand, we find that a lower equity ratio and a higher short-term debt ratio increase the probability of being successful in a public tender. On the other hand, the success means that the companies can continue to work after the award with a lower equity ratio than comparable companies without an award, regardless of whether the company was successful in a traditional or a "green" public tender. We conclude from this that the success in a PP is a substitute for one's own financial strength and thus facilitates access to external financing. The estimation results differ depending on whether public procurement in general or the sub-group of "green" public procurement is examined.

The Impact of Public Procurement on Financial Barriers to Green Innovation: Evidence from European Community Innovation Survey

“…At first sight this result seems to contradict Baum et al (2021) who find that a lower equity ratio and a higher short-term debt ratio is no bottleneck for a company's chance to win a public procurement contract and to conduct the project. However, it is important to note that Baum et al (2021) consider SMEs in general while we evaluate potentially innovative firms. Financial institutions are particularly restrictive if innovative firms apply for funding.…”

“…Moreover, the authors focus on information that outsiders such as banks have access to for assessing a company's financial strength while we use the CIS data which provides an individual assessment of a company's financial means required for pursuing an innovative project. The comparison with Baum et al (2021) suggests that -given that a procurement contract exists -a potentially innovative company's perception of the importance of financial gaps as barrier to innovation might be different from the ex-post assessment by banks using information from balance sheet data.…”

“…The effect was even more pronounced for financially constrained small and young firms. Baum et al (2021) use official SMEs balance sheet data from AMADEUS. By conducting a difference-in-difference analysis they find that a lower equity ratio and a higher short-term debt ratio increase the companies' probability of success in a public tender.…”