Subsidies, Shadow of Death and Productivity
AbstractOur panel data from over 10,000 Finnish firms during the years 2003-2010 sheds light on the effect of different business subsidies on firm productivity performance and on the relationship between firms’ lagged labor productivity and market exit. We find that not any of the subsidy types have statistically significant short-term or longer term impacts on the firms’ productivity performance. It seems that particularly employment and investment subsidies tend to be allocated to the relatively less efficient companies. We further observe that a decline in the firm’s lagged labor productivity levels are clearly more weakly related to the subsidized firms’ exit than to the exit of firms that have not received any subsidies. Our empirical findings thus hint that the allocation of subsidies to the relatively inefficient firms increases their liquidity making their market exit less likely than it would be otherwise. In other words, our data indicate that subsidy allocation weakens the shadow of death phenomenon observed in the previous empirical studies and hinders the process of creative destruction in the economy.
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Bibliographic InfoPaper provided by The Research Institute of the Finnish Economy in its series ETLA Working Papers with number 16.
Length: 28 pages
Date of creation: 05 Aug 2013
Date of revision:
Find related papers by JEL classification:
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L53 - Industrial Organization - - Regulation and Industrial Policy - - - Enterprise Policy
- O25 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-10 (All new papers)
- NEP-BEC-2013-08-10 (Business Economics)
- NEP-EFF-2013-08-10 (Efficiency & Productivity)
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