Government procurement contracts, external audit certification, and financing of small- and medium-sized enterprises

Abstract

Entrepreneurs worldwide often face obstacles in financing their businesses, hindering their ability to grow. Government procurement offers an opportunity to access lucrative contracts and benefit from a procurement auditing process that could enhance access to finance. Likewise, externally audited financial statements can enhance credibility and lessen financing hurdles. We examine whether government procurement contracts and external audit certifications jointly influence financing access and whether ownership, size, and firm age matter. We find that access to finance is more likely to be an obstacle to the operations of small- and medium-sized enterprises (SMEs) with government procurement contracts than those without such contracts, regardless of whether they seek external audit certification. Additionally, the effect of external audit certification on the likelihood of access to finance being an obstacle to SME operations reduces sharply with foreign ownership, size, and age for SMEs involved in government procurement. We also find that the impact of government procurement contracts reverses for SMEs in low- and lower-middle-income countries. Our findings have policy implications, especially with the growing implementation of affirmative action programs to promote the involvement of SMEs in government procurement.