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Subsidies, Shadow of Death and Productivity

  • Koski, Heli
  • Pajarinen, Mika

Our 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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Paper provided by The Research Institute of the Finnish Economy in its series ETLA Working Papers with number 16.

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Length: 28 pages
Date of creation: 05 Aug 2013
Date of revision:
Handle: RePEc:rif:wpaper:16
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  1. Bernd Ebersberger, 2011. "Public funding for innovation and the exit of firms," Journal of Evolutionary Economics, Springer, vol. 21(3), pages 519-543, August.
  2. Baghana, Rufin, 2010. "Public R&D Subsidies and Productivity: Evidence from Firm-Level Data in Quebec," MERIT Working Papers 055, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  3. Shunsuke Managi, 2010. "Productivity measures and effects from subsidies and trade: an empirical analysis for Japan's forestry," Applied Economics, Taylor & Francis Journals, vol. 42(30), pages 3871-3883.
  4. David, Paul A. & Hall, Bronwyn H. & Toole, Andrew A., 2000. "Is public R&D a complement or substitute for private R&D? A review of the econometric evidence," Research Policy, Elsevier, vol. 29(4-5), pages 497-529, April.
  5. Jeremy T. Fox & Valérie Smeets, 2011. "Does Input Quality Drive Measured Differences in Firm Productivity?," NBER Working Papers 16853, National Bureau of Economic Research, Inc.
  6. Carlos Carreira & Paulino Teixeira, 2011. "The shadow of death: analysing the pre-exit productivity of Portuguese manufacturing firms," Small Business Economics, Springer, vol. 36(3), pages 337-351, April.
  7. Guido M. Imbens & Jeffrey M. Wooldridge, 2008. "Recent Developments in the Econometrics of Program Evaluation," NBER Working Papers 14251, National Bureau of Economic Research, Inc.
  8. Inha Oh & Jeong-Dong Lee & Almas Heshmati & Gyoung-Gyu Choi, 2009. "Evaluation of credit guarantee policy using propensity score matching," Small Business Economics, Springer, vol. 33(3), pages 335-351, October.
  9. Griliches, Zvi & Regev, Haim, 1995. "Firm productivity in Israeli industry 1979-1988," Journal of Econometrics, Elsevier, vol. 65(1), pages 175-203, January.
  10. Girma, Sourafel & Görg, Holger & Strobl, Eric & Walsh, Frank, 2008. "Creating jobs through public subsidies: An empirical analysis," Labour Economics, Elsevier, vol. 15(6), pages 1179-1199, December.
  11. Irwin, Douglas A. & Klenow, Peter J., 1996. "High-tech R&D subsidies Estimating the effects of Sematech," Journal of International Economics, Elsevier, vol. 40(3-4), pages 323-344, May.
  12. Gianmarco I.P. Ottaviano & Aki Kangasharju & Mika Maliranta, 2009. "Local Innovative Activity and Regional Productivity: Implications for the Finnish National Innovation Policy," Chapters, in: The Evaluation of the Finnish National Innovation System, pages 203-238 The Research Institute of the Finnish Economy.
  13. Matthias Almus, 2004. "The Shadow of Death -- An Emperical Analysis of the Pre-Exit Performance of New German Firms," Small Business Economics, Springer, vol. 23(3), pages 189-201, October.
  14. Koski, Heli & Pajarinen, Mika, 2011. "The role of business subsidies in job-creation start-ups, gazelles and imcumbents," Discussion Papers 1246, The Research Institute of the Finnish Economy.
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