Government Subsidies and the Landscape of Industrial Sectors

Filippo Belloc (University of Siena)
Antonino Lofaro (University of Siena)

Abstract

Do government subsidies shift the performance of targeted sectors? In this paper, we address this question by measuring the broad effects of more than 30000 subsidy programs across 121 countries and 105 3-digit manufacturing sectors over the period 2012-2019. We find that the impact of subsidies on the performance (size, capital investments, liquidity, productivity) of firms pre-existing to the treatment is modest at best. If anything, government subsidies affect sectoral outcomes by attracting new firms with certain characteristics. In doing so, subsidy attributes matter significantly, with loans and export promotion initiatives attracting capital-intensive firms in targeted sectors, and labour-intensive firms mostly entering sectors targeted by tax breaks. We also find that direct transfers reduce market concentration and that subsidies targeted at smaller firms attract companies with less than 25 employees without increasing average firm-level employment. Innovation oriented subsidies are found to improve R&D activity among pre-existing firms, with remarkable differences across sectors. Finally, we find evidence that in quasi-monopolistic markets, dominant firms may translate subsidies into greater revenue shares without improving innovation and productivity

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