Government Demand and Domestic Firms Growth: Evidence from Uganda

Using detailed administrative data, this paper analyzes the relationship between participation in public procurement (selling to government entities) and firm performance in Uganda. We find positive associations with total sales, gross profits, total compensation of employees, number of workers and sales per employee. Overall sales growth associated with selling to government entities is partly at the expense of a reallocation of firm-level supply away from nongovernment buyers, suggesting there may be short-term capacity expansion constraints. The results are substantiated in an event study approach that accounts for potential self-selection of firms into government procurement, as well as the heterogeneity in timing of selection into public procurement. The reduction in sales to private sector is persistent. It is less acute for firms in services, and within services, among firms that use low-skill labor, suggesting capacity constraints may not be only short term.