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Are Federal Policies Toward Small Business Contracting Succeeding?

Tuesday, March 22, 2011

If the goal is to help historically disadvantaged groups get a larger share of federal dollars, the answer is yes. But if the goal is to encourage federal bureaucracies to shift their contracting dollars from large businesses to small businesses, the answer is no.

Our elected officials want the federal bureaucracy to contract more with small business. To this end, Congress has established supportive policies and has tasked the Small Business Administration (SBA) with monitoring federal agencies to ensure they are meeting small business contracting targets and reporting the results to Congress and the president.

Are these efforts getting the federal government to contract more with small businesses? The answer depends on the goal of the efforts. If the goal is to help historically disadvantaged groups get more federal funds, the answer is yes. But if the goal is to encourage federal bureaucracies to give their contracting dollars to small rather than large businesses, the answer is no.

Small business has been losing market share of federal contracting.

At first glance, small business owners appear to have benefited from the contracting environment of the past few years. In 2009, small companies tapped $96.8 billion in federal contracting funds, compared to $82.4 billion (in 2009 dollars) in 2005. This increase in small business contracting dollars is deceptive, however, because federal contracting has risen the past five years. In fact, small business has been losing market share. From 2005 to 2009, small business’s portion of prime contracting dollars dropped either 1.5 or 3.5 percentage points (depending on which SBA contracting figures are examined). In 2009, the small business slice of what the feds spent on contractors was 21.9 percent—below the target of 23 percent Congress set in 1996.

In contrast to the overall decline in small business’s share of federal contracting dollars, the share of contracting dollars going to small businesses owned by socially disadvantaged individuals has risen. The SBA explains that “socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as members of a group.” The SBA identifies blacks, Hispanics, Asians, and Native Americans as examples of socially disadvantaged groups.

SBA data show that from 2005 to 2009, the share of federal contracting dollars going to “small disadvantaged businesses” increased from 6.6 percent to 7.6 percent of the total. And the share of federal contract money going to women-owned businesses increased from 3.2 percent in 2005 to 3.7 percent in 2009.

The share of federal contracting dollars going to 'small disadvantaged businesses' has increased.

The increasing share of small-business contracting dollars going to small disadvantaged businesses is reflected in the rise of contracting dollars allocated under specific programs. For example, the share of contracting dollars going to businesses operating under the Historically Underutilized Business Zones program for qualified small businesses operating in disadvantaged communities increased from 1.9 to 2.8 percent.

To see why historically disadvantaged groups have been able to buck the overall trend in federal contracting to small businesses, take a look at what has happened with the SBA’s 8(a) program in recent years. As the SBA explains, the 8(a) program is “a business assistance program for small disadvantaged businesses” designed, in part, to help these businesses “gain a foothold in government contracting.”

The figure below shows that, in the past decade, funding under the 8(a) program has been on a tear. Since 2000, the real dollar value of contracts under the 8(a) program has increased more than 2.5 times and, since 2004, the value has almost doubled.

Shane 3.21.11

In short, while small business has seen an overall decline in its share of federal contracting dollars, the slice going to businesses owned by women and members of socially disadvantaged groups has increased. These numbers indicate that the main group experiencing a decline in its share of federal contracting dollars over the past five years must have been white, male small-business owners.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.

FURTHER READING: Shane also coined “The Boehner Uncertainty Principle,” explained “Why Small Business Wants Repeal of ObamaCare,” and wrote “Small Business, Big Regulatory Burden.” Alex Brill adds “Responding to the Recession: The Challenge for Unemployment Insurance,” Martin Feldstein says “Want to Boost the Economy? Lower Corporate Tax Rates,” and Kevin Hassett and Aparna Mathur offer a “Report Card on Effective Corporate Tax Rates.”

Image by Rob Green/Bergman Group.

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