THEORETICAL AND CONCEPTUAL FRAMEWORK OF THE STUDY
3.4 HYPOTHESIS DEVELOPMENT
3.4.1 Relationship between government intervention through preferential procurement and firm growth performance and development
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Relational governance theory holds that inter-firm exchanges (or projects) are governed by two key mechanisms – contracts and relational norms (McNeil, 1974), and suggests that relational norms surpass contracts in their ability to minimize opportunistic behaviour (Boulay, 2013), promote value-creation between firms, and enhance performance (Lusch and Brown; 1996;
Noordewier et al., 1990; Williams et al., 2015). Unlike contracts, relational governance is an endogenous mechanism that binds firms together by prescribing acceptable behaviours (Heide and John, 1992) and enhances inter-firm working relationships, by embedding information flows in a matrix of social ties rather than resorting to contracts or their enforcement by legal action (Ferguson et al., 2005).
In addition to the ten relational norms proposed in McNeil’s (1980) analysis, ensuing research has identified role integrity, solidarity, and reciprocity to be the most important norms, which are related to the behaviours of trust, communication, aligned objectives and shared benefits (Blois and Ivens, 2007; Williams et al., 2015). Williams et al. (2015) contend that relationship quality is important for the development of such relational norms and behaviours throughout a project. Moreover, based on network and social exchange theory in marketing channels, relationship quality has emerged as a critical aspect of business to business exchange (Palmatier et al., 2007).
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Preferential procurement practices in public procurement are an important government intervention strategy for stimulating the growth and development of SMCs in the construction industry of many countries including South Africa (Hawkins, 2012; Watermeyer et al., 2001).
Although the firm growth and survival studies in developing countries have expanded significantly in recent years, the impact of government interventionist policies on the business performance at an individual firm level remains to be fully explored (Hansen et al., 2009). The OECD (2010) however argued that policy initiatives are critical towards growth of small enterprises. The OECD (2014) suggested that well-designed policy interventions may be used to support technology absorption, transform lagging industries and develop new sources of innovation-led growth.
Little is known about the actual effectiveness of preferential procurement in promoting the growth and development of SMCs, and only a handful of studies have attempted to analyse whether these programmes have met their goals in the construction industry (Chatterji et al., 2014; Letchmiah, 2012). Findings from previous studies on the impact of affirmative action programmes such as set-asides in the US construction industry indicate that these programmes:
significantly increased contract awards to SMCs (Blanchflower and Wainwright, 2005;
Marion, 2007; Morris et al., 2006); have a positive and significant empirical impact on SMC growth regardless of how growth is measured (House-Soremekun, 2006); and plays a significant role in the net survival rates of these SMCs (Marion, 2007; Morris et al., 2006).
Particularly, House-Soremekun (2006) reported a significantly positive relationship between participation in minority set-aside programs in the US and growth in annual company profit.
However, Blanchflower and Wainwright (2005) argue that these programmes have not achieved their objective of improving the position of SMCs in the construction industry. Holzer and Neumark (2000) also reported that firms moving from set-aside projects to an environment without set-asides did not fail at higher rates than comparable firms.
Related studies in other sectors, such as manufacturing, indicate that companies receiving government support perform better and survive longer (Wjewardena and De Zoysa, 2005).
Fajnzylber et al. (2009) reported that while access to government support did not appear to significantly influence the profits of microenterprises in Mexico, it improved the likelihood of their survival. However, Ferraz et al. (2016) found empirical evidence that government procurement contracts in Brazil led to an increase in firm growth and survival. Similarly, Reis and Cabral (2015) reported that after the introduction of preference programmes in Brazil in 2007, small and microbusinesses’ participation and their odds of winning public contracts
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increased. Brown et al. (2005) also found that technical assistance from the Romanian government had weak effects on firm growth. In contrast, Hansen et al. (2009) investigated whether interaction with state-owned enterprises (SOEs), government agencies and institutions affected firm performance among Vietnamese SMEs and found that receiving initial government assistance is insignificant for survival, but has a positive impact on revenue growth and firm performance.
Iqbal and Urata (2002) suggested that various government policy interventions have played a significant role in the explanation of SME successes in the Asian region. Ofori and Chan (2001) examined key factors that influence the development of the construction industry and technology transfer and found the role of the government to be most significant. Walker et al.
(2003) stated that more innovative procurement strategies drive higher levels of innovation in the construction industry. Drawing on the experience of Singapore’s construction industry, where the government actively promoted joint ventures between local and foreign contractors, Debrah and Ofori (2001b) and Ofori (1994b) stressed how governments as a major client of the construction industry can influence technology and knowledge transfer, as well as local capacity building through skills development.
In South Africa, the government presumes that the growth of an enterprise is related, to a large extent, to the opportunity and experience gained over time in the execution of works (SANS, 2003). Consequently, targeting SMCs and increasing their contract participation rate and by extension their rate of gain of experience, is one of the primary means of stimulating the growth of SMCs in the construction industry. Given that the primary objective of Targeted Procurement in South Africa is to promote the participation of targeted businesses in public- sector contracts by providing greater access to work opportunities, it can therefore be argued that the increase in these businesses’ turnover is the primary objective, with room for specifying other secondary economic and social contractor development objectives, such as employment, knowledge transfer and skills devolvement. However, the relationship between Targeted Procurement strategies remains to be empirically proven. Therefore, the following research hypotheses were formulated, towards answering Research Objectives Two and Three.
Main Hypothesis 1: Targeted Procurement strategies have a direct and significant relationship with social indicators of construction SMC development.
Hypothesis 1a: Targeted Procurement strategies have a direct and significant relationship with skills development.
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Hypothesis 1b: Targeted Procurement strategies have a direct and significant relationship with application of innovation and technology.
Hypothesis 1c: Targeted Procurement strategies have a direct and significant relationship with skills transfer.
Hypothesis 1d: Targeted Procurement strategies have a direct and significant relationship with advancement on the cidb Register of Contractors.
Hypothesis 1e: Targeted Procurement strategies have a direct and significant relationship with JV partnerships.
Main Hypothesis 2: Targeted Procurement strategies have a direct and significant relationships with economic indicators of construction SMC development.
Hypothesis 2a: Targeted Procurement strategies have a direct and significant relationship with turnover.
Hypothesis 2b: Targeted Procurement strategies have a direct and significant relationship with company assets.
Hypothesis 2c: Targeted Procurement strategies have a direct and significant relationship with number of employees.
Hypothesis 2d: Targeted Procurement strategies have a direct and significant relationship with company profits.