The impact of public grants on firm-level productivity: Findings from the Czech food industry

Abstract

Studying the effects of public entrepreneurship and small- and medium-sized enterprise (SME) policies on productivity (i.e., technological efficiency) is important, because the investment policies primarily aim to reduce allocation inefficiencies, enable usage of economies of scale, promote new production methods and technological development. We reviewed the recently published studies, and we show that they often lack fundamental information, such as a sample description and numbers of supported and non-supported firms. Keeping in mind the importance of transparent and rigorous empirical evaluations, we evaluated the effects of investment support from the European Regional and Development Fund (ERDF) on the productivity of the firms operating in the Czech food processing industry two years after the end of the programme. Methodologically, we apply the propensity score matching approach (PSM) combined with a difference in differences approach (DID) based on the firm-level data accounting for 157 firms (i.e., 77.3% of all beneficiaries within the industry) and a control sample of 1224 firms that have not been supported by the intervention. We use three measures of productivity-production efficiency, labour productivity and total factor productivity (TFP). The obtained findings showed that investment subsidy had a positive impact on labour productivity of supported firms. However, the effects on TFP were negative. The impact on production efficiency indicator was proven to be inconclusive. It follows from the results that the productivity of subsidised firms did not improve through an internal increase in efficiency (efficiency of the use of inputs), which indicates no significant technological change. The subsidy decision-making processes should be more careful and transparent to ensure allocating resources only to the projects with growth potential.