Reconciling Conflicting Policy Objectives in Public Contracting: The Enabling Role of Capabilities

• Published date: 01 September 2017
• Author: Sandro Cabral
• Date: 01 September 2017
• DOI: http://doi.org/10.1111/joms.12269

Reconciling Conflicting Policy Objectives in Public

Contracting: The Enabling Role of Capabilities

Sandro Cabral

Insper and Federal University of Bahia

ABSTRACT This paper analyses how capabilities can reconcile conflicting objectives in policy

driven public contracting. Results obtained from a quasi-experiment involving a policy

intervention to favour small firms (SMEs) in Brazil show that public manager’s contract-

management capabilities can promote cost savings, increased responsiveness (government-level

outcomes), and enhanced buyer-supplier coordination when favoured firms are successful in

public contracting. Execution capabilities of private suppliers positively influence firm-level

outcomes by attenuating the severity of sanctions against favoured firms due to deficient

provision. The paper highlights the mechanisms for leveraging performance in public-private

interactions when conflicting goals are present despite inherent contract incompleteness and

bureaucratic rigidity, thus adding to the current knowledge of strategic management in the

context of public organizations.

Keywords: capabilities, conflicting goals, firm outcomes, government outcomes, public

contracting

INTRODUCTION

In an attempt to address ongoing calls to connect strategic management research and

broader societal goals, there is increasing interest in studying the role of governments as

strategic actors who shape business opportunities, enable value creation, and influence

firm-level outcomes (Barney, 2005; Kivleniece and Quelin, 2012; Mahoney et al., 2009;

Rangan et al., 2006). Some strategy scholars are also examining new forms of interac-

tion across public-private boundaries (Cabral et al., 2013; Klein et al., 2013; Rufın and

Rivera-Santos, 2012) while others are trying to understand the relationships between

public policies and business performance (Inoue et al., 2013; Lazzarini, 2015).

Despite these recent efforts, little is known about the mechanisms that can reconcile

potential conflicting goals arising from policymaking, such as address government

Address for reprints: Sandro Cabral, Insper, Rua Quata, 300, S~ao Paulo-SP, 04546-042, Brazil and Federal

University of Bahia, Salvador, 40170-115, Brazil (SandroC2@insper.edu.br).

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C2017 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 54:6 September 2017

doi: 10.1111/joms.12269

objectives and promote positive impacts on public and private outcomes. In this vein,

public contracting (i.e., when a public entity is the buyer) is a promising area in which

competing policy objectives exist and it can benefit from theoretical insights and policy

recommendations emerging from strategic management scholars (McGahan, 2007;

McGahan et al., 2013). Indeed, accounting for almost one-third of government expendi-

tures in developed countries, public contracting is often subject to government interven-

tion to promote economic growth, stimulate the development of certain industries, and

to activate regional production chains by favouring local and small firms in government

acquisitions (Brown et al., 2010; De Mariz et al., 2014). On the other hand, government

activism in public contracting may generate undesired effects such as higher costs and

deficient provision (Marion, 2007, 2009).

In this paper, I argue that the concept of capabilities can be particularly useful to

highlight how buyers and suppliers can reduce their exposure to contractual hazards in

public contracting and leverage the benefits of public-private interactions. By examining

the role of capabilities in the reconciliation of contrasting policy objectives, this paper

can also address some underexplored areas in management scholarship, such as the

performance implications of policies in the pursuit of the public interest (McGahan

et al., 2013), and the consequences of public-private interactions in public contracting

(Kivleniece and Quelin, 2012).

In order to address the voids listed above, I explore government actions to favour

small businesses in public contracting as my empirical context. In this case, preferential

treatment to small firms in public contracting represent a setting in which conflicting

policy objectives can take place. For example, the attainment of government goals in

terms of fostering entrepreneurship might occur at the expense of superior procurement

costs, reduced responsiveness and deficient quality provision. I develop four hypotheses

exploring how the individual capabilities of public managers (contract-management

capabilities) and the organizational capabilities of private firms (execution capabilities)

influence contractual performance (government-level and firm-level outcomes) when

favoured firms are successful in public contracting auctions, thus helping to reconcile

conflicting policy objectives.

I test these hypotheses by using a unique dataset of 1472 service contracts in Brazilian

public universities from 2003 to 2012. Brazil implemented new legislation favouring

small and medium enterprises (SMEs) in public contracting at federal level in 2007.

This removed several bureaucratic restrictions so as to reduce entry costs for entrants

and allowed purchasing units to allocate bids to SMEs. This meant that I could use

observations from auctions before and after the new legislation to identify the impact of

the exogenous intervention and the moderating role of capabilities on government and

firm outcomes. I employ performance indicators specific to the public contracting set-

ting. I use cost savings and responsiveness during the contracting process as measures of

government-level outcomes as these variables reflect dimensions expected by citizens:

reduced procurement costs and service availability in a timely fashion. Given the impos-

sibility to observe in my empirical setting traditional measures of performance such as

firm-level financial returns, and the existing heterogeneity of the contracts observed in

this study, I employ the number of contractual sanctions against the firm executing the

contract as my measure of firm-level outcome (ex-post performance).

824 S. Cabral

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C2017 John Wiley & Sons Ltd and Society for the Advancement of Management Studies