Abstract
Capital subsidies form a major instrument of industrial and regional policy for economically developed countries all over the world, including many European Union and Organisation for Economic Cooperation and Development coun- tries. Research findings have challenged the effectiveness of capital subsidies in assist- ing productivity growth. This paper treats capital subsidies as a new input and estimates a stochastic production frontier that is not bound by the restrictions imposed by approaches used in previous research works. It is shown that capital subsidies affect total factor productivity growth through technical change and not through scale effi- ciency, while the disadvantaged location of firms affects technical efficiency.
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