Vertical Industrial Policy in the EU: An Empirical Analysis of the Effectiveness of State aid

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may State aid: a key tool of industrial policy in the EUThis paper assesses the effectiveness of vertical industrial policies within the EU. For the purpose of this paper, industrial policy is defined as "the set of government interventions that by way of taxes (or subsidies) and regulations on domestic products or factors of production attempt to modify the allocation of domestic resources that results from the free operation of the market" (Gual 1995, p. 9).To narrow down what otherwise is a very broad definition, we exclude measures directed to primary sectors as well as those related to non-tradable industries, such as housing services or retail trade. Policies that affect most firms in a country to a similar extent -for example, investment tax credits or subsidies for the employment of a particular kind of labour -are also excluded.State aid is part of the toolkit available for governments to implement their preferred industrial policy. This toolkit is somewhat limited for EU countries due to the agreements and legislation directed towards creating a single internal market, including a common policy with respect to trade barriers, mutual recognition of standards, and so on. European laws defining the legality of state aid constitute perhaps the most important element in the agreed framework for implementing industrial policies within Europe.The main economic justification for industrial policy, including state aid, is the quest for efficiency. Thus, government aid aims to correct market failures, such as externalities, asymmetric information, market power, coordination problems, and public goods. The most common example of (positive) externalities is the research and development (R&D) activity of private companies. Asymmetric information, in turn, is used as a justification for granting aid to small and medium-sized enterprises (SMEs). Asymmetric information between a bank and an SME about the latter's potential to repay a loan or about the riskiness of its projects may prevent even a profitable SME to access finance.Market failures such as these justify the general objectives of R&D or SME support. Additional arguments are needed, however, to justify government intervention in specific industries or firms. Optimal use of government resources suggests that intervention should focus on those industries where externalities are particularly important. In the case of R&D, general support to all sectors may be desirabl...

State Aid and Export Competitiveness in the EU

“…It had done so until 2006 although accompanied by the note that 'data on aid to manufacturing may be overestimated' 13 . The reason for this is that the Commission used to include various types of horizontal aid into the calculation of aid to the manufacturing because most horizontal aid can be assumed to target the manufacturing sector (see also Gual and Jódar, 2006). So the allocation of most horizontal aid measures is based on an assumption and not on actual data since horizontal state aid data by sector is not available.…”

“…The relatively low and declining share of sector-specific aid is to a certain extent due to the Commission's preference for horizontal aid. Therefore it may be assumed that a good part of the aid measures notified as horizontal aid is de facto sector-specific aid (see also Gual and Jódar, 2006). This is why we operate with a composite measure of manufacturing aid that is far broader than sector-specific aid to the manufacturing sector.…”

“…For the election variable we can assume that governments are more prone to pay out subsidies when there are elections to be held in the same year. Our choice of instruments is partly similar to that of Gual and Jódar (2006) insofar as we have a set of instruments reflecting the political system albeit the actual instrumental variables are different. We also differ with respect to the second set of instruments where we opt for government expenditures whereas Gual and Jódar (2006) use state aid provided to other sectors as instrumental variables.…”

“…With respect to the focus on the manufacturing sector our paper is also related to Gual and Jódar (2006). They argue that the majority of horizontal aid provided by Member States is de facto sectoral aid to the manufacturing sector and analyse the effects of manufacturing aid (as a share of value added) on total factor productivity (TFP) growth for a sample of eleven Member States over the period 1995-2003.…”

State Aid Policy in the European Union

“…In the first category are studies which investigate the effects of industrial policy at the country level; in the second category, industrial policy is examined at the firm level. Gual and Jodar‐Rosell (); Aghion et al () and Stöllinger and Holzner () fall into the first category. Since the main instrument of industrial policy in the European Union countries is state aid, all of these studies consider state aid as their main independent variable.…”