Capital Subsidies and the Performance of Firms

In many countries, governments grant different capital subsidies to the business sector in order to promote growth. Also the EU, provides this type of subsidies. As De Long and Summers (1991) suggest there may be market failure justifications for public subsidisation of firms. However, because the use of subsidies may cause problems, it is far from clear how they affect long-run economic growth. This study examines the effects on total factor productivity of public capital subsidies to firms in Sweden between 1987 and 1993. Panel data which distinguish between subsidised and unsubsidised firms in the manufacturing industry are used. The results suggest that subsidisation can influence growth, but there seems to be little evidence that the subsidies have affected productivity.