Journal of Industry, Competition and Trade

, Volume 15, Issue 2, pp 189–204 | Cite as

Subsidies, the Shadow of Death and Labor Productivity

  • Heli Koski
  • Mika Pajarinen


Our panel data from over 10,000 Finnish firms during the years 2003–2010 elucidates 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 none of the subsidy types have statistically significant positive short-term or longer-term impacts on the firms’ labor productivity. It appears that employment and investment subsidies, in particular, tend to be allocated to relatively less efficient companies. We further observe that declines 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 suggest that the allocation of subsidies to 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.


Labor productivity Business subsidies Firm exit Enterprise policy Technology policy 

JEL Classification

D24 J23 L10 L53 O25 


  1. Almus M (2004) The shadow of death—an empirical analysis of the pre-exit performance of new German firms. Small Bus Econ 23:189–201CrossRefGoogle Scholar
  2. Baghana R (2010) Public R&D subsidies and productivity: evidence from firm-level data in Quebec. UNU-MERIT working paper series 2010-055Google Scholar
  3. Buts C, Jegers M (2012) A note on state aid and concentration: the case of Belgium. Eur Compet J 8:153–162CrossRefGoogle Scholar
  4. Buts C, Jegers M (2013) The effect of ‘State aid’ on market shares: an empirical investigation in an EU Member State. J Ind Compet Trade 13(1):89–100CrossRefGoogle Scholar
  5. Carreira C, Teixeira P (2011) The shadow of death: analysing the pre-exit productivity of Portuguese manufacturing firms. Small Bus Econ 36:337–351CrossRefGoogle Scholar
  6. David PA, Hall BH, Toole AA (2000) Is public R&D a complement or substitute for private R&D? A review of the econometric evidence. Res Policy 29:497–529CrossRefGoogle Scholar
  7. Dearden L, Reed H Van Reenen J (2000) Who gains when workers train? Training and corporate productivity in a panel of British industries. CEPR Discussion Papers 2486Google Scholar
  8. Ebersberger B (2011) Public funding for innovation and the exit of firms. J Evol Econ 21:519–543CrossRefGoogle Scholar
  9. Fox JT, Smeets V (2011) Does input quality drive measured differences in firm quality? Int Econ Rev 52:961–989CrossRefGoogle Scholar
  10. Gelabert L, Fosfuri A, Tribó JA (2009) Does the effect of public support for R&D depend on the degree of appropriability? J Ind Econ LVII:736–767CrossRefGoogle Scholar
  11. Girma S, Görg H, Strobl E, Walsh F (2007) Creating jobs through public subsidies: an empirical analysis. Labour Econ 15:1179–1199CrossRefGoogle Scholar
  12. Griliches Z, Regev H (1995) Firm productivity in Israeli industry: 1979–1988. J Econ 65:175–203CrossRefGoogle Scholar
  13. Ilmakunnas P, Maliranta M (2005) Technology, labour characteristics and wage-productivity gaps. Oxf Bull Econ Stat 67:623–645CrossRefGoogle Scholar
  14. Imbens G, Wooldridge JM (2009) Recent developments in the econometrics of program evaluation. J Econ Lit 47:5–86CrossRefGoogle Scholar
  15. Irwin DA, Klenow PJ (1996) High-tech R&D subsidies: estimating the effects of Sematech. J Int Econ 40:323–344CrossRefGoogle Scholar
  16. Koski H, Pajarinen M (2013) The role of business subsidies in job creation of start-ups, gazelles and incumbents. Small Bus Econ 41:195–214CrossRefGoogle Scholar
  17. Koski H, Tuuli J (2010) Business subsidies in Finland: the dynamics of application and acceptance stages. Etla Discussion Papers 1225Google Scholar
  18. Kösters S (2010) Subsidizing start-ups: policy targeting and policy effectiveness. J Ind Compet Trade 10(3–4):199–225CrossRefGoogle Scholar
  19. Maliranta M, Rouvinen P (2006) Informational mobility and productivity: Finnish evidence. Econ Innov New Technol 15:605–616CrossRefGoogle Scholar
  20. Managi S (2010) Productivity measures and effects from subsidies and trade: an empirical analysis for Japan’s forestry. Appl Econ 42:3871–3883CrossRefGoogle Scholar
  21. Morgan SL, Harding DJ (2006) Matching estimators of causal effects. Prospects and pitfalls in theory and practice. Sociol Methods Res 35:3–60CrossRefGoogle Scholar
  22. Oh I, Lee J-D, Heshmati A, Choi G-G (2009) Evaluation of credit guarantee policy using propensity score matching. Small Bus Econ 33:335–351CrossRefGoogle Scholar
  23. Ottaviano G, Kangasharju A, Maliranta M (2009) Local innovative activity and regional productivity: implications for the Finnish national innovation policy. In: Evaluation of the Finnish National Innovation System—full report, The Ministry of Education and the Ministry of Employment and the Economy. Taloustieto, Helsinki, pp 203–238Google Scholar
  24. Wallsten SJ (2000) The effects of government-industry R&D programs on private R&D: the case of the Small Business Innovation Research program. Rand J Econ 31:82–100CrossRefGoogle Scholar
  25. Wooldridge JM (1995) Score diagnostics for linear models estimated by two stage least squares. In: Maddala GS, Phillips PCB, Srinivasan TN (eds) Advances in econometrics and quantitative economics: essays in honor of Professor C. R. Rao. Blackwell, Oxford, pp 66–87Google Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.The Research Institute of the Finnish Economy (ETLA)HelsinkiFinland

Personalised recommendations