Competing for government procurement contracts: The role of corporate social responsibility

• Date: 01 May 2018
• DOI: http://doi.org/10.1002/smj.2767
• Published date: 01 May 2018
• Author: Caroline Flammer

RESEARCH ARTICLE

Competing for government procurement contracts:

The role of corporate social responsibility

Caroline Flammer

Strategy & Innovation Department, Questrom

School of Business, Boston University, Boston,

Massachusetts

Correspondence

Caroline Flammer, Questrom School of Business,

Boston University, 595 Commonwealth Avenue,

Office 634A, Boston, MA 02215.

Email: cflammer@bu.edu

Research Summary: This study examines whether corpo-

rate social responsibility (CSR) improves firms’competi-

tiveness in the market for government procurement

contracts. To obtain exogenous variation in firms’social

engagement, I exploit a quasi-natural experiment pro-

vided by the enactment of state-level constituency stat-

utes, which allow directors to consider stakeholders’

interests when making business decisions. Using constitu-

ency statutes as instrumental variable (IV) for CSR, I find

that companies with higher CSR receive more procure-

ment contracts. The effect is stronger for more complex

contracts and in the early years of the government-

company relationship, suggesting that CSR helps mitigate

information asymmetries by signaling trustworthiness.

Moreover, the effect is stronger in competitive industries,

indicating that CSR can serve as a differentiation strategy

to compete against other bidders.

Managerial Summary: This study examines how compa-

nies can strategically improve their competitiveness in the

market for government procurement contracts—a market

of economic importance (15–20% of GDP). It shows that

companies with higher social and environmental perfor-

mance (CSR) receive more procurement contracts. This

effect is stronger for more complex contracts, in the early

years of the government–company relationship, and in

more competitive industries. These findings indicate that

firms’CSR can serve as a signaling and differentiation

strategy that influences the purchasing decision of gov-

ernment agencies. Accordingly, managers operating in

the business-to-government (B2G) sector could benefit

from integrating social and environmental considerations

into their strategic decision making.

Received: 13 August 2015 Revised: 15 October 2017 Accepted: 16 October 2017 Published on: 26 February 2018

DOI: 10.1002/smj.2767

Strat Mgmt J. 2018;39:1299–1324. wileyonlinelibrary.com/journal/smj Copyright © 2018 John Wiley & Sons, Ltd. 1299

KEYWORDS

corporate social responsibility, government procurement

contracts, information asymmetry, non-market strategy,

trust

1|INTRODUCTION

Government procurement is big business: Every year, large sums of taxpayers’money are spent by

governments on goods and services that are of importance to the economy and society at large. Gov-

ernment procurement of goods and services accounts for approximately 15–20% of the gross domes-

tic product (GDP) in developed and developing countries, in many countries this percentage is

much higher (World Trade Organization, 2014). This constitutes significant business opportunities

for companies, not only nationally but also internationally. For example, the members of the Agree-

ment on Government Procurement (GPA)—which includes Canada, Hong Kong, Israel, Japan, Sin-

gapore, Switzerland, USA, the European Union, and many others—have opened procurement

activities worth an estimated $1.7 trillion annually to international competition from GPA member

countries (World Trade Organization, 2014).

Despite the economic importance of this market, we know surprisingly little about firm-level

strategies to obtain government procurement contracts. In fact, I was not able to find any articles

within the management literature that theoretically or empirically explores the question of whether

and how companies can improve their competitiveness in the market for government contracts. The

extant literature in competitive strategy mainly focuses on the competitive positioning of companies

in the business-to-consumer (B2C) and business-to-business (B2B) context (e.g., Dyer & Singh,

1998; Porter, 1980, 2008).

Yet, the market for government procurement contracts is fundamentally different from the B2C

and B2B context in several dimensions. In particular, the purchasing decision of the government dif-

fers from the one of end consumers and businesses. Specifically, the process of awarding procure-

ment contracts starts when an agency of the federal government identifies a need for the purchase of

a good or service and posts a solicitation on the Federal Business Opportunities website. Public pro-

curement projects include a broad range of projects such as the building of airports, schools, stadi-

ums, and tunnels, the construction of military equipment, as well as investments in medical and

technical innovations. Companies then submit their proposals. Agency personnel review and evalu-

ate the alternative proposals and make the final decision. Where the government procurement pro-

cess differs from the B2B and B2C context is that public procurement regulations put constraints on

the contracts and award mechanisms that public procurement agencies can use (Tadelis, 2012). In

particular, government purchases rely on agency directors. These directors often take into account

economic as well as non-economic factors such as political pressure from special interest groups,

sensitivity to congressional representatives in a firm’s home district, and other political aspects

(e.g., Rundquist, Lee, & Rhee, 1996; Shepsle & Weingast, 1981; Weingast, Shepsle, & Johnsen,

1981). The consideration of such non-economic criteria in the purchasing decision makes selling

goods and services to the government a unique and different proposition for companies.

Most procurement contracts are variants of “cost-plus”and “fixed-price”contracts. In fixed-price

contracts, the supplier is offered a pre-specified price. In cost-plus contracts, no price is pre-speci-

fied, but the supplier is reimbursed for the costs plus a fee. In general, cost-plus is the preferred type

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