How does public investment support change the capital structure and productivity of small enterprises? An empirical study of the food industry

Abstract

The impact evaluations of public investments are essential for policymakers to evaluate the effectiveness of public resource allocation. European public investment subsidies target small companies to enhance their competitiveness and viability in the market. This article uses the average treatment effect and the difference-in-difference approach to evaluate the impacts of investment support from the Rural Development Programme and the Operational Programme Enterprise and Innovation on structural and economic indicators of small enterprises. This representative case study of 550 supported small companies from the Czech food and beverage industry during 2007-2015 clearly shows that investment subsidies increase the fixed assets, the credit-to-debt ratio and the labour productivity of supported companies versus nonparticipants. However, the discussion with recent studies indicates that this is not always positive for participants since high growth versus nonparticipants could result in crowding-out effects and increasing long-term and short-term debt that negatively impact technical efficiency.

The Impact of Public Grants on Firm-Level Productivity: Findings from the Czech Food Industry

“…Firms adjust their investment decisions according to available support schemes and realise relatively less productive investments [31,44,48,63]. As stated by Špička [40], the investment support may lead to a deadweight loss when subsidised firms undertake a similar investment as they would realise without the subsidy. Rizov et al [44] also point out that subsidies can cause technical inefficiency, as supported firms slacken off their efforts and willingness to seek cost-improving methods.…”

“…Such policies are regarded as an instrument to boost private investments with the aim to enhance growth, productive efficiency and competitiveness. Overall, most of the studies evidenced that public support fails to increase firms' productivity, e.g., references [34,44,45,76,77], and positive effects on productivity have been identified rather exceptionally, e.g., references [40,43,78].…”

“…Despite the growing body of literature investigating the investment support policy contribution to competitiveness and efficiency of subsidised firms, e.g., references [21][22][23][24][25][26][27][28][29][30], the minority of studies focuses specifically on productivity effects, e.g., references [31][32][33][34][35]. The productivity assessment using only the labour productivity indicator, as common in a number of studies, e.g., references [25,[36][37][38][39][40], may bias the overall productivity effects. Bernini et al [32] argue that labour productivity may increase because of the capital deepening induced by the subsidy, whereas the efficiency of all inputs used may not increase at all.…”

“…Previous empirical findings and theoretical studies show that the effects of subsidies on productivity level may be both positive and negative. Whereas Bernini et al [32], Howell [45] and many others document negative impact of subsidies on productivity as a result of allocative (and technical) efficiency, soft budget constraints and the shift of subsidies to less productive enterprises, there are also arguments for this support, e.g., references [31,40,43], particularly because of investment-induced productivity gains caused by the interaction of credit and risk attitudes with subsidies.…”

“…Methodologically, we apply the propensity score matching approach (PSM) combined with a difference in differences approach (DID) based on the firm-level data accounting for 77.3% of all beneficiaries within the industry. In this study we build on prior research on the effects of EU investment support in the Czech agribusiness [39,40,52,53], which indicates overall positive impacts of investment subsidies on the financial performance of the supported enterprises. In contrast to previous studies that have in view only labour productivity as one of the performance indicators, we solely focus on productivity effects by employing more productivity indicators in one analysis, namely the production efficiency indicator, labour productivity and TFP, which increases the robustness of our findings.…”