How Effective are Investment Subsidies in Flanders? An RDD Approach

Abstract

This paper analyzes the effects of a subsidy program for small and medium sized enterprises in Flanders from 2004 to 2009 (the program was called 'growth grant', or in Dutch 'de groeipremie'). The subsidies were awarded according to a ranking system that favored young, growing and productive firms with a strong cash flow, granting subsidies to the highest scoring firms until the depletion of funds. The nature of this allocation system creates a sharp cut off in granting the subsidy according to the score: only firms above the cut off score are granted the subsidy. This quasi-experimental setting allows us to estimate a local average treatment effect around this cut off, making use of regression discontinuity design (RDD) methodologies. We find a sizable positive effect on firm-level investment, employment, output and productivity for the firms that were granted the subsidy, but mainly for the very small firms, e.g. firms with less than 10 employees. For the larger firms, we only find a positive effect on profits, which suggests that they use the subsidy to finance investments that they would have undertaken anyway.