Government demand and firm growth

Public procurement in developing countries accounts for approximately 13% of GDP, offering a significant market opportunity for domestic firms, especially those facing demand constraints. This paper explores the impact of selling to government entities on firm performance in Uganda, leveraging detailed administrative data and an event study methodology that corrects for firm self-selection and heterogeneity in the timing of the treatment. The results reveal that while firms increase their total sales after entering government contracts, they do not see improvements in productivity (measured by value added per worker). Moreover, sales to non-government customers drop sharply. This reallocation effect is persistent. This effect is not observed when firms start to sell to large private-sector buyers. Drawing on an original survey of firms engaged in public procurement, we highlight potential drivers of these dynamics, including capacity constraints and profitability differences between public and private sector sales.