Investment grants and firm productivity

This paper evaluates the effectiveness of awarding multiple investment grants to the same firm. Several factors have contributed to bringing public subsidies back to the limelight: the COVID-19 pandemic, trade wars between the US and China, the war in Ukraine, and the disruption in global supply chains. These factors contributed to a global wave of public subsidies in China, in the United States, and in the European Union.

This research assesses the impact of investment grants by the European Regional Development Fund (ERDF) on the productivity of Portuguese firms in 2007-2018. In this period, a high concentration of subsidies in a small group of firms that have received multiple grants stands out. Around 30% of the supported firms received multiple grants (an initial grant and a booster grant), accounting for about 65% of the total ERDF. This evidence raises the questions of the reasonability and effectiveness of awarding multiple investment grants to the same firm.

The results show a positive and significant impact of an investment grant booster shot on a firm’s labor productivity. Moreover, this effect is much larger than the one of a single grant, suggesting that allocating multiple subsidies to the same firm may be an effective strategy to improve firm performance. A more granular analysis shows that only small-sized firms benefit from an investment grant booster shot, which may be due to financial constraints. However, micro-sized firms do not show any benefits from a second investment grant. This result suggests a minimum firm-size threshold for an investment grant booster shot to be effective. Therefore, firm performance since the first grant should be an eligibility criterion for receiving a second grant.

Click here to go to the paper by Fernando Alexandre, Miguel Chaves, and Miguel Portela.