Abstract:
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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