Government contracting program may be failing minority businesses

 
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Minorities face all sorts of headwinds when trying to start a business in the United States. Researchers have shown that black people have less access to higher education, receive worse terms when applying for loans, and have fewer self-employed family members from whom to learn the entrepreneurial arts. The fact is that Americans from minority communities are less represented than white people in the country’s business culture.

The U.S. Small Business Administration (SBA) runs a program designed to change the status quo. Under Section 8(a) of the Small Business Act of 1953, Congress directed this federal agency to steer government contracts to businesses owned by citizens from minority backgrounds and others with socioeconomic hardships. The 8(a) Business Development Program, as it’s known, helps these people with management training, technical assistance and mentoring, and access to government contracts without competition (no-bid contracts) for up to nine years. The idea is to grow businesses in disadvantaged communities, according to the SBA: “The 8(a) program is an essential instrument for helping socially and economically disadvantaged entrepreneurs gain access to the economic mainstream of American society. The program helps thousands of aspiring entrepreneurs to gain a foothold in government contracting.”

The U.S. government is the biggest customer in the world, making federal contracting an attractive and lucrative pursuit. In fiscal year 2016, the government awarded $100 billion in contracts to small businesses, including $39.1 billion to small disadvantaged businesses and another $16.3 billion to businesses run by veterans disabled in the line of duty. In essence, many of these contracts are subsidized; they are purposely awarded not to the most competitive or efficient companies, but to help these target groups.

An academic study worth reading: “Effects of Federal Socioeconomic Contracting Preferences,” in Small Business Economics, 2017.

Study summary: Grant Lewis of George Mason University compares two groups of SBA beneficiaries: participants in the 8(a) program and service-disabled, veteran-owned small businesses (businesses owned by veterans who were disabled in the line of duty). These veterans enjoy access to no-bid government contracts, but not the training and other benefits awarded to the 8(a) recipients.

Lewis uses data from the Federal Procurement Data System (FPDS) to review over 16,000 small businesses that received government contracts between 2007 and 2012. Many firms have more than one classification, but he narrows down the pool to 1,621 service-disabled, veteran-owned small businesses and 3,738 participants in the 8(a) program. He compares these to non-preferred firms receiving SBA support, which he uses as a baseline. He also employs data on employment and revenue figures and controls for the personal characteristics of the business owners.

Key takeaways:

  • Compared to a service-disabled, veteran-owned business, an 8(a)-participating firm is more likely to go out of business.
  • Compared to small businesses not-favored by the SBA, an 8(a)-participating firm is no more or less likely to remain in business over the 6-year period surveyed.
  • Both groups (8(a) participants and service-disabled, veteran-owned businesses) grow in terms of employment approximately 12 percent more than the baseline firms, even when controlling for the value of awards received. Both also see significant sales growth.
  • Indeed, 8(a) businesses benefit from sole-source contracts and other features of the program that help them get business. But these features do not appear to make them more competitive or stronger businesses.
  • “Participating firms outperform because they are being handed more money, not because they are becoming stronger businesses.”
  • Lewis suspects that the 8(a) program is being taken advantage of by people who incorporate businesses solely for short-term benefits and who close their businesses after their eligibility expires (after nine years). “The limited term of the program, rather than encouraging firms to become self-sustaining, in fact encourages them to exit the market once subsidies are withdrawn.”

Helpful resources:

  • The Small Business Administration publishes eligibility requirements for the 8(a) program on its website. It also has scorecards with data – measuring “how well federal agencies reach their small business and socio-economic prime contracting and subcontracting goals” – and its methodology. The SBA also has resources and programs for women-owned businesses.
  • Fbo.gov is a website listing government contracting opportunities.
  • The University of Pittsburgh’s Office of Research explains the federal contracting process.

Other research:

  • A 2017 paper in Small Business Economics questions the use of public funds to help incubate small businesses.
  • A 2007 paper in the Journal of Labor Economics looks at the hurdles black people face when opening a business in the U.S.
  • This chapter in a 2016 textbook on corporate social responsibility outlines the history of programs designed to ensure fair hiring practices.
  • We have written on affirmative action in university admissions, Asian students and the “model minority” myth, and gender quotas in political races.

Last updated: June 9, 2017

 

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Citation: Lewis, Grant. “Effects of Federal Socioeconomic Contracting Preferences.” Small Business Economics, 2017. DOI: 10.1007/s11187-017-9860-z.