# **1 Introduction**

Modern economies are characterized by large governments that play a unique role as final producers of public goods and services. Throughout this production process, governments of all levels (local, provincial, regional and national) actively buy goods and services from private firms operating in most industries. Overall, the value of government purchases accounts for around 12% of the global GDP.

Government purchases are extremely locally concentrated, both across countries and regions. In 2010, governments awarded less than 2% of the value of procurement contracts to foreign firms in countries like Italy, France, or Spain. Within Spain, only 40% of public procurement expenditure in the region of Catalonia was awarded to firms located outside of Catalonia (of which more than 39% was awarded to firms in Spain and the remaining 1% to foreign firms).<sup>1</sup> One possible explanation for this phenomenon is the presence of natural frictions such as transportation costs, language and cultural barriers, or information constraints, which perhaps are particularly severe in the context of government purchases.

**Home bias in government procurement.** An alternative explanation for this phenomenon is the presence of exceptionally high levels of home bias in government procurement. For example, in the case of the US, the federal government openly and actively discriminates against foreign firms when making its sourcing decisions. In fact, the “Buy American” scheme represented one of the main blocks in Joe Bidden’s trade policy agenda during the 2020 presidential campaign.<sup>2</sup> In the case of Canada, this preferential treatment is not only implemented towards national firms but also firms within the same region. In March 2022, the government of Ontario passed a bill whose main block consists of changing the procurement rules so that purchases must give preferences to local (Ontario-based) firms.<sup>3</sup>

This phenomenon is particularly intriguing in the case of Europe. Even though the EU regulation based on “the single market spirit” should make the market for public procurement perfectly integrated, “Improving access to procurement markets” is one of the six strategic priorities to improve the public procurement system of the European Commission.<sup>4</sup>

**Research question.** In this paper, we ask: _What is the effect of governments’ home bias_

> 1All these numbers come from our own calculations using TED data (see also Kutlina-Dimitrova and Lakatos (2014)). For comparison, in Appendix C, we use our data together with input-output tables and data on trade flows across regions to show that import penetration rates in procurement are significantly lower than those in overall trade also when looking at narrowly defined sectors.

> 2The Buy American Act (1933) requires the US government to “prefer” US-made products and services in its purchases. “Joe Biden will mobilize the talent, grit, and innovation of the American people and the full power of the federal government to bolster American industrial and technological strength and ensure the future is made in all of America by all of America’s workers. Biden believes that American workers can out-compete anyone, but their government needs to fight for them.” (Link)

3 “By harnessing our immense buying power, BOBI (building Ontario businesses initiative) will allow our government to build our businesses in every corner of our province and support new jobs for our workers.”(Link) 4See for instance “Making Public Procurement work in and for Europe”. (Link) 1