Do Governmental Subsidies Increase Productivity of Firms? Evidence from a Panel of Slovene Firms

Abstract

Our study focuses on examining the relationship between productivity (or productivity growth) and state aid allocation in Slovenia during the period of 1998 to 2012. The country itself represents almost an ideal case as the amount of subsidies being allocated in the relevant period decreased significantly after joining the EU. Our study builds on the theoretical model of Aghion et al. (2015) arguing that sectorial policy can enhance growth and efficiency if it is made competition-friendly. The main results show, that by increasing dispersion of subsidies within particular sectors by one standard deviation, the productivity growth increases by 0.03 percentage points on average, ceteris paribus. State aid has been especially important in the period of economic downturn (2009-2012). However we found evidence that firms receiving a higher portion of subsidies were less productive when compared with counterparts from the same sector receiving less or no subsidies. The difference was the biggest during the period of economic downturn.

Industrial Policy Effects and the Case for Competition

“…The authors thus conclude that instead of "picking winners" and distorting rivalry, there is virtue in picking sectors that are already competitive in order to enhance productivity and productivity growth. This finding is supported by Domadenik, Koman, and Prasnikar (2018), who find that when subsidies were more widely dispersed within particular sectors, they increase productivity growth by 0.03 percentage points. These findings directly undermine the notion of industrial policy that targets specific firms and seeks to create national champions as a means of driving growth.…”

“…Investigating the impact of state aid to the Slovenian manufacturing industry, Schweiger (2011) finds that there is no significant impact on TFP. Another Slovenian study finds that firms receiving a higher portion of subsidies are less productive when compared with counterparts from the same sector receiving fewer or no subsidies (Domadenik, Koman, and Prasnikar 2018). However, the same study finds that subsidies increase productivity growth by 0.03 percentage points when they are more widely dispersed across firms in a given sector (Domadenik, Koman, and Prasnikar 2018). Along the same lines, in studying 11 EU member states between 1992 and 2003, Gual and Jodar-Rosell (2006) find that state aid, awarded primarily for objectives such as R&D investment, SMEs, or worker training, despite it ultimately targeting the manufacturing sector, has a positive effect on TFP growth.…”

Government Subsidies and Firm-Level Markups: Impact and Mechanism

“…Lastly, although the micro-effects of government subsidies have been analyzed from different perspectives, such as export behavior [11,12], firm innovation [13,14], most studies have focused on the impact of government subsidies on firm productivity [15][16][17][18]. Admittedly, this is related to the fact that total factor productivity (TFP) is the most important indicator of competitiveness in the process of economic development.…”

Industry 4.0 as an answer to the productivity gap in European catchingup economies?

“…"Competition is not the curse but the cure to European falling competitiveness", maintained Gunea and Erixon [46] after a failing merger of Alstom and Siemens, advocated by French and German governments in order to defend incumbent firms against Chinese competition in Europe. The EU does not support the champions building industrial policy (picking the winner), and even in the case of sectoral industrial policies it prefers horizontal measures and not subsidies targeted to particular firms [22]; 3) concerning the divide between the core and the (super) periphery, Table 5 does not validate specific policies favoring catching-up economies. It confirms the dominant European doctrine of economic convergence, i.e., the strategy of reducing income disparities between the developed European countries and the catching-up countries, where the main role belongs to the free movement of capital from the more developed to the catching-up countries based on the claim of the higher marginal productivity of capital in catching-up countries.…”