Grant deadweight and profitability: the case of Northern Ireland

Abstract

Since the mid-1960s manufacturing firms in Northern Ireland have enjoyed a higher level of subsidy from government than firms in any other UK region. This paper examines the cumulative impact of this support on Northern Ireland manufacturing, using a combination of company accounts and government expenditure data. The starting point for the study is the observation that Northern Ireland manufacturing companies were significantly more profitable than their counterparts in Great Britain in the year investigated (1988). This contrasts strongly with official figures, relating to manufacturing productivity and wage levels, which suggest that Northern Ireland firms ought to have had profit levels significantly below comparable UK companies. The difference between firms' expected and actual profit rates defines an unexplained profitability wedge. Estimating the cumulative effect of grants and subsidies on the aggregate accounts of Northern Ireland manufacturing suggests that grants and subsidies were increasing gross operating profit by a third, almost doubling net operating profit and raising profit before tax by 129%. These effects are equivalent in size to the otherwise unexplained profitability wedge. The implication is that grant-aid was having a very significant effect on company profitability in Northern Ireland before 1988, but having little impact on growth or efficiency. The high degree of deadweight implied calls into question the value of an industrial development regime based on grants and subsidies. In particular, it is questionable whether such a policy regime can encourage competitiveness as it isolates firms from the rigours of the market and potentially leads to dependency.