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 sustain and grow them over time. Government procurement offers these entrepreneurs an opportunity to access lucrative contracts and benefit from the procurement auditing process that could enhance access to finance. Likewise, since many small businesses lack dependable financial statements, seeking the services of an external auditor to authenticate them can enhance their credibility while lessening financing hurdles. We examine whether government procurement contracts and external audit certifications jointly influence financing access and whether ownership, size, and firm age matter. Using 102,031 firm-year observations from 151 countries for the period 2007-2021, we find that SMEs without government procurement contracts are less likely to face obstacles in accessing financing than those with such contracts, regardless of whether they seek external audit certification. Additionally, the effect of external audit certification on the likelihood of not facing financing obstacles increases sharply with foreign ownership, size, and age among SMEs not 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 and other marginalized groups in government procurement.