European funds and firm performance: evidence from a natural experiment

Abstract

This paper examines the impact of European Union (EU) funds on the performance of private firms. We exploit a quasi-natural experiment arising from an administrative redrawing of geographical boundaries, which led to a discrete change in regional eligibility. This caused a sudden and substantial increase in access to EU grants directed at firms located in 33 Portuguese municipalities. Using a comprehensive linked employer-employee administrative dataset which covers the universe of private firms between 2003 and 2010, our difference-in-differences estimates uncover a significant and positive causal effect of increased eligibility on firms’ sales, labor productivity, and average wages, while employment is not significantly altered. Although firms’ sales in the non-tradable sectors are positively impacted, firms’ sales in more competitive, tradable, sectors remain unaffected by increased access to EU funds.