Foreign market access in government procurement

Governments are known to prefer domestic over foreign suppliers in the award of procurement contracts despite cost and quality considerations. Literature exploring this “home-bias” in public purchases has exclusively focused on the microeconomic interplay between the tendering entity and the bidding firms. There are, however, other factors that influence governments’ buying decisions. Using self-assembled and hitherto unexplored data on government procurement submitted by Japan and Switzerland to the WTO, we study the determinants of foreign public procurement over the period 1990-2003. In doing so, we make a threefold contribution to this literature. One, we examine the effect of macroeconomic, political economy, procurement-specific and domestic policy factors that influence governments’ sourcing decisions. Two, we provide for an empirical test of Baldwin's (1970, 1984) "neutrality proposition" after controlling for other factors. Three, we test empirically whether the WTO's Agreement on Government Procurement (GPA) has been successful in increasing foreign market access. Our results suggest the importance of the magnitude of procurement demand and of the average contract size awarded to foreign suppliers in these governments' purchases from abroad. While the impacts of domestic firm competitiveness attributes, political budget cycles and Keynesian macroeconomic compulsions depend on the econometric specification used, we find that Baldwin's "neutrality proposition" does not hold for the public purchase pattern of either country. Moreover, membership of the GPA is not found to increase the value of foreign procurement in either country, though it seems to increase the import demand for contracts.