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Abstract
In the evaluation of investment subsidies one of the critical issues concerns the assessment of deadweight, that is, the degree to which projects would have been carried out without grant assistance. With the increasing restrictions on and cuts in subsidies for investment projects in the EU countries maximisation of the impact of the public resources that remain can be achieved through their allocation for projects with minimum deadweight. This paper studies the profile of subsidised zero deadweight investment projects – projects that would be abandoned without public subsidies – in Finland. The empirical analysis is conducted using micro level data on investment projects by private sector firms. The data set comprises 3,423 projects that were granted public investment subsidies between 2001 and 2003. Our results show that the likelihood of zero deadweight is significantly dependent on the characteristics of the subsidised firm, the characteristics of the investment project and the location of the subsidised firm.
Acknowledgement
We gratefully acknowledge funding from the Yrjö Jahnsson Foundation (projects 4977 and 5204). Anu Tokila also wishes to thank the Academy of Finland for financial support (project 200856). The authors would like to thank Mikko Mäkinen, Francois Pouget, Hannu Tervo, Petri Böckerman and Boris A. Portnov for their valuable comments on this paper.
Notes
1. We concentrate on zero deadweight projects only, because their net impacts are more straightforward compared to partial deadweight projects despite the fact that zero deadweight projects also include the possibility of displacement effects.
2. These two stages of evaluation are linked together (see e.g. European Commission Citation1999a–Citationc). Ex ante evaluation helps to ensure that the subsidised projects are in accordance with the objectives of the programme. Ex post evaluation recapitulates and judges an intervention when it is over.
3. For more on displacement, see e.g. Tervo (Citation1989, Citation1990) and Lenihan (Citation1999).
4. Note the term ‘freerider’ in Heijs (Citation2003) can be referred to as deadweight.
5. Besides non‐repayable cash grants, the Ministry of Trade and Industry also supports business by loans, guarantees and export finance.
6. Finland’s post‐war economic development was based on intensive investment and the import of foreign capital (Ministry of Finance Citation2005). In the 1960s and 1970s the investment rate, i.e. investment as a proportion of total output, was extremely high, occasionally exceeding 30%. The investment rate fell during the deep recession of the early 1990s. After reaching its lowest, 15.5% in 1994, investment began to recover, peaking at 20.5% in 2001. Since, it has fallen slightly to around 18–19% during 2002–2006 (Ministry of Finance Citation2006a).
7. Alternatively, one could have tried to evaluate deadweight by using control groups that allow controlling for selectivity bias (see e.g. Roper and Hewitt‐Dundas Citation2001). However, we are unable to construct a suitable group of investment projects, as it is very difficult to access data on non‐assisted investment projects in Finland. See Lenihan and Hart (Citation2004), and references therein, for a general discussion of alternative approaches in evaluating the impact of government policies.
8. We only consider the option of zero deadweight, as the options of partial deadweight (2)–(4) are much harder to quantify by size.
9. Based on Letters to the Member States, Regional Aid Map 2000–2006, SG(99) D/10189.
10. The maximum amounts of aid for each Assisted Area are directive and can be exceeded depending on the character and the significance of the project.
11. The Finnish economy experienced a very deep recession in the early 1990s. From the mid 1990s, after joining the EU and adopting the euro currency, Finland’s economic growth took an upward turn, with a GDP growth of 3–6% in 1995–2000. The growth rate fell to 2% in 2001–2002, but it has accelerated since (see e.g. Ministry of Finance Citation2006b).
12. According to the Decree of Council of State (1200/2000) (Ministry of Justice 2000), a small business is defined as a firm with personnel not exceeding 50 employees and with either an annual turnover of a maximum of [euro]7 million or a balance sheet total of a maximum of [euro]5 million.
13. Since our specification of the error variance in model (1) is different from that in models (2) or (3), a direct comparison of parameter estimates is not advisable.
14. Note that the form of heteroskedasticity is not rejected in specification (2) and (3) when tested against a more general form of heteroskedasticity (see diagnostics in Table ). The test for the more general heteroskedasticity compares the model with a model that includes all the independent variables save the constant term, industry and year dummies in the heteroskedastic function.
15. The CM test for the normality of the error term is implemented as described in Newey (Citation1985: 1062).
16. We also tried to add the turnover of the firm in a second polynomial form to study whether the impact of turnover is dependent on its level. Because it was not significant at the 5% level, it was concluded that the impact of turnover on zero deadweight does not vary with the level of turnover.
17. We also tried various other regional variables, including the level of urbanisation, provincial centre dummies and the firm’s distance from the provincial centre, but they did not prove to be significant determinants.
18. In our data the range of project costs, turnover of the firm and relative intensity of assistance are [832, 20 million], [0, 118.7 million] and [0.192, 2.427], respectively. The mean values of the variables are given in the Appendix.
19. Because the illustration assumes that the project costs are same ([euro]92,503), the difference in the investment‐bearing capacities (5 vs 10) means that the annual turnover is [euro]462,515 in the former firm and [euro]925,030 in the latter firm.
