Subsidies, new firms, and productivity in global manufacturing

We investigate how government subsidies influence the productivity of new firms, by leveraging data on more than 30,000 government subsidy initiatives and about 1.2 million manufacturing firms distributed worldwide in the years 2012-2019. First, using a DiD framework with multiple time periods, we document that sectors exposed to subsidies experience a statistically significant increase in new firm entry rates. We then examine the firm-level data through a series of augmented 3-way FE DiD models. Our findings reveal that subsidies have significant effects on the productivity of new firms. On average, subsidies lead to the entry of new firms with 5.53 % lower productivity compared to those entering untreated markets. The productivity gap of new firms in subsidized markets persists in the years after entry. We also apply a text recognition method to analyze the effects of specific subsidy attributes. We find that unconditional tax breaks and loans are mostly responsible for the negative effects of subsidies, while subsidies promoting firm internationalization and investments by small firms may lead to the establishment of more productive firms. Subsidies aimed at supporting the adoption of green and automation technologies do not always reduce the productivity of new firms. Finally, estimates about incumbents’ performance show that subsidies may intensify competition in the market and do not necessarily lead to greater resource misallocation within sectors.