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Is Subsidizing Entry An Optimal Policy?

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  • E. Santarelli
  • M. Vivarelli

Abstract

Public subsidies in support of new firm foundation are among the most frequently used instruments of industrial policy in the Euro zone. This paper analyses their effectiveness and efficiency vis-ý-vis some features of the overall process of industry dynamics in Italian manufacturing. To this end, the survival and growth patterns of new small firms are investigated using a unique dataset on electrical and electronic engineering in Italy. As regards survival, our results confirm the findings of other studies, namely that the hazard rates are particularly high in the early stages of firm's lifecycle. As far as growth is concerned, the main finding in this study is that Gibrat's Law fails to hold in the years immediately following start-up, when smaller firms must 'rush' in order to achieve a size large enough to enhance their likelihood of survival; conversely, in later stages of a firm's lifecycle this Law cannot be ignored. These results radically question the use of subsidies as an optimal policy for the support of new entries, since the subsidy brings about a major bias in the process of market selection (including substitution and deadweight effects) and hampers the post-entry scale adjustment of newborn firms. Copyright 2002, Oxford University Press.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 378.

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Date of creation: 2000
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Handle: RePEc:bol:bodewp:378

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  1. Audretsch, David B & Mahmood, Talat, 1995. "New Firm Survival: New Results Using a Hazard Function," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 97-103, February.
  2. Boeri, Tito & Cramer, Ulrich, 1992. "Employment growth, incumbents and entrants : Evidence from Germany," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 10(4), pages 545-565, December.
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  7. Evans, David S., 1986. "Tests of Alternative Theories of Firm Growth," Working Papers, C.V. Starr Center for Applied Economics, New York University 86-36, C.V. Starr Center for Applied Economics, New York University.
  8. Chesher, Andrew, 1979. "Testing the Law of Proportionate Effect," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 27(4), pages 403-11, June.
  9. Frank, Murray Z, 1988. "An Intertemporal Model of Industrial Exit," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(2), pages 333-44, May.
  10. Dunne, Paul & Hughes, Alan, 1994. "Age, Size, Growth and Survival: UK Companies in the 1980s," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 42(2), pages 115-40, June.
  11. Evans, David S., 1986. "The Relationship Between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Working Papers, C.V. Starr Center for Applied Economics, New York University 86-33, C.V. Starr Center for Applied Economics, New York University.
  12. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(4), pages 671-98, November.
  13. Baldwin,John R. & Gorecki,Paul With contributions by-Name:Caves,Richard E., 1998. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521633574.
  14. Bronwyn H. Hall, 1986. "The Relationship Between Firm Size and Firm Growth in the U.S. Manufacturing Sector," NBER Working Papers 1965, National Bureau of Economic Research, Inc.
  15. Amemiya, Takeshi, 1984. "Tobit models: A survey," Journal of Econometrics, Elsevier, Elsevier, vol. 24(1-2), pages 3-61.
  16. Audretsch, David B. & Santarelli, Enrico & Vivarelli, Marco, 1999. "Start-up size and industrial dynamics: some evidence from Italian manufacturing," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 17(7), pages 965-983, October.
  17. Audretsch, David B, 1991. "New-Firm Survival and the Technological Regime," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 441-50, August.
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