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EU enlargement to the less developed countries in Central and Eastern Europe is forcing policy makers to reconsider the role of business subsidies in the EU. For example, to what extent the use of investment subsidies should be allowed in the future? Which regions should be supported? In this paper we study conditions under which investment subsidy is a necessary requirement for project implementation in Finland. Empirical analysis is conducted using micro level data on investment projects of private sector firms. The data set comprises 1,836 projects that received public investment subsidies between 2001 and 2003. Our results show that the necessity of the investment subsidies is strongly dependent on the location of the firm as well as on the size of the firm and the investment project.

Most governments tackle the economic issues of underdeveloped areas by offering subsidies aimed at fostering economic activities and local employment. Localized policies put constraints on where businesses may locate to receive subsidies, but they generally place few restrictions on whom subsidized businesses must hire. Using administrative data on firms and workers in Italy, we adopt a multi-cutoff regression discontinuity design to empirically assess and decompose the employment effect of substantial incentives for the replacement or establishment of new capital. Our empirical strategy allows identifying the geographical origin and labor market status of new hires. The results show how the majority of recruits come from new entrants to the labor market, in particular, young people and students, while displacement effects are limited. It appears that subsidized companies tend to keep their most valuable staff and hire more qualified young people. Overall, we find only a modest spatial dispersion of the effects or a possible crowding-out of the local labor market.

Subsidising investment in lagging regions is an important regional policy instrument in many countries. Some argue that this instrument is not specific enough to concentrate the aid towards the regions that are lagging behind most, because investment subsidies benefit capital owners who might reside elsewhere, possibly in very rich places. Checking under which conditions this is true is thus highly policy relevant. The present paper studies regional investment subsidies in a multiregional neoclassical dynamic framework. We set up a model with trade in heterogeneous goods, with a perfectly integrated financial capital market and sluggish adjustment of regional capital stocks. Consumers and investors act under perfect foresight. We derive the equilibrium system, show how to solve it, and simulate actual European regional subsidies in computational applications. We find that the size of the welfare gains depends on the portfolio distribution held by the households. If households own diversified asset portfolios, we find that the supported regions gain roughly the amounts that are allocated to them in the form of investment subsidies. If they only own local capital stocks, a part of the money is lost through the drop in share prices. From the point of view of total welfare, the subsidy is not efficient. It can lead to a welfare loss for the EU as a whole and definitely leads to welfare losses in the rest of the world, from where investment ows to the supported EU regions.

Subsidising investment in lagging regions is an important regional policy instrument in many countries. Some argue that this instrument is not specific enough to concentrate the aid towards the regions that are lagging behind most, because investment subsidies benefit capital owners who might reside elsewhere, possibly in very rich places. Checking under which conditions this is true is thus highly policy relevant. The present paper studies regional investment subsidies in a multiregional neoclassical dynamic framework. We set up a model with trade in heterogeneous goods, with a perfectly integrated financial capital market and sluggish adjustment of regional capital stocks. Consumers and investors act under perfect foresight. We derive the equilibrium system, show how to solve it, and simulate actual European regional subsidies in computational applications. We find that the size of the welfare gains depends on the portfolio distribution held by the households. If households own diversified asset portfolios, we find that the supported regions gain roughly the amounts that are allocated to them in the form of investment subsidies. If they only own local capital stocks, a part of the money is lost through the drop in share prices. From the point of view of total welfare, the subsidy is not efficient. It can lead to a welfare loss for the EU as a whole and definitely leads to welfare losses in the rest of the world, from where investment ows to the supported EU regions.

This paper reviews the trends in government subsidies and investments in and for Indian agriculture; develops a conceptual framework and model to assess the impact of various subsidies and investments on agricultural growth and poverty reduction; and, presents several reform options with regard to re-prioritizing government spending and improving institutions and governance. There are three major findings. First, initial subsidies in credit, fertilizer, and irrigation have been crucial for small farmers to adopt new technologies. Small farms are often losers in the initial adoption stage of a new technology since prices of the agricultural products are typically being pushed down by greater supply of products from large farms, which adopted the new technology. But as more and more farmers have adopted HYV, continued subsidies have led to inefficiency of the overall economy. Second, agricultural research, education, and rural roads are the three most effective public spending items in promoting agricultural growth and poverty reduction during all periods. Finally, the trade-off between agricultural growth and poverty reduction is generally small among different types of investments. As for agricultural research, education, and infrastructure development, they have large growth impact and a large poverty reduction impact. Several policy lessons can be drawn. Agricultural input and output subsidies have proved to be unproductive, financially unsustainable, environmentally unfriendly in recent years, and contributed to increased inequality among rural Indian states. To sustain long-term growth in agricultural production, and therefore provide a long-term solution to poverty reduction, the government should cut subsidies of fertilizer, irrigation, power, and credit and increase investments in agricultural research and development, rural infrastructure, and education. Promoting nonfarm opportunities is also important. However, simply reallocating public resources is not the full solution. Reforming institutions can have an equal, if not larger, impact on future agricultural and rural growth and rural poverty reduction. -- from Authors' Abstract ; Non-PR ; IFPRI1; Theme 9; Subtheme 9.2; GRP32; Country and regional food, nutrition, and agricultural strategies ; DSGD; MTID; NDO

In the evaluation of investment subsidies one of the critical issues concerns the assessment of deadweight, that is, the degree to which projects would have been carried out without grant assistance. With the increasing restrictions on and cuts in subsidies for investment projects in the EU countries maximisation of the impact of the public resources that remain can be achieved through their allocation for projects with minimum deadweight. This paper studies the profile of subsidised zero deadweight investment projects – projects that would be abandoned without public subsidies – in Finland. The empirical analysis is conducted using micro level data on investment projects by private sector firms. The data set comprises 3,423 projects that were granted public investment subsidies between 2001 and 2003. Our results show that the likelihood of zero deadweight is significantly dependent on the characteristics of the subsidised firm, the characteristics of the investment project and the location of the subsidised firm. ; peerReviewed

Abstract This paper examines optimal government policy when private investment generates information, but investors cannot internalize the informational value their actions have to others. Equilibrium exhibits inefficient delay, as investors adopt a wait‐and‐see approach. The government can alter incentives via an investment subsidy, but complications arise, since future subsidies may induce investors to disregard current policy initiatives. The paper shows that the government achieves its desired outcome only when the the investment subsidy is financed by a non‐distortionary, lump‐sum tax. When taxation is distortionary, the government faces a time inconsistency problem that may prevent effective policy.

Investment subsidies are the most popular means of public support for enterprises. However, evaluation studies measuring their net effect suggest that their effectiveness is highly debatable. The social mechanism of investment subsidies has been investigated in the article with a flexible, abductive methodological approach. Both methodological and data source triangulations have been applied: qualitative and quantitative methods deployed; and viewpoints of manifold groups (policy-makers, beneficiaries, journalists) reconstructed. The article goes beyond previous findings indicating the small net effects of intervention by investigating the social mechanism accounting for the size of the effects. It also indicates that the permanency of the programme may be explained by the analysis of the programme theories of stakeholders involved in implementation.

AbstractThis paper analyses the observed phenomenon of public for private fund substitution in industrial assistance, by examining the public and private sector funding of investment under different assumptions about the nature of the private capital market. This bears on the effectiveness of industrial subsidies, and has implications for welfare and the design of optimal assistance contracts. It is shown that fund substitution depends crucially on the elasticity of investment with respect to the user cost of capital in the without‐subsidy position, and on the nature of any amount and rate constraints on the assistance contract.

AbstractHow do investment subsidies bear on pure redistribution when coupled with capital income taxes? In a heterogeneous agent, neoclassical growth framework it is found that on impact, with no optimizing behavior, investment subsidies are good for growth but bad for redistribution. The opposite holds for capital income taxes. But when the government acts as a Stackelberg leader vis‐à‐vis the private sector (the follower), the optimal feedback policy is by construction time‐consistent and implies that in a long‐run optimum the tax scheme does not distort accumulation. This holds regardless of social preferences. For the feedback Stackelberg equilibrium I find that (pure) redistribution can go either way and capital income taxes are nonzero in the long‐run, time‐consistent optimum, depending on the social weight of those who receive redistributive transfers, the distribution of pretax factor incomes, and the intertemporal elasticity of substitution. It is argued that investment subsidies may be an important indirect tool for redistribution, and may allow for the separation of "efficiency" and "equity" concerns.