The Efficacy of Interest Subsidies as an Investment Incentive Instrument

Abstract

Purpose: Since interest subsidies have always been a crucial part of investment policy in Türkiye, the study focused on the efficacy of interest subsidies as an investment incentive.
 Methodology: First, the interest and cash-flow sensitivity of the investment expenditure are explored before touching upon the literature on the interest and credit subsidy sensitivity of the investments without omitting the influential financing parameters. Then, financing parameters in sectoral balance sheets and the financing outlook of the Turkish companies are examined to infer which type of credit subsidy should be preferred, before bringing concrete observations from the recent capital formation trend.
 Findings: First, funding conditions, economic cycles and market frictions stemming from informational asymmetry influence the efficacy of the interest subsidies. Second, interest subsidies only become effective when economic and financial volatility surge, which implies a lesser effect than quasi-tax incentives. Third, monetary and interest subsidy authorities should coordinate. Finally, the credit guarantee mechanism is more powerful than interest subsidies to achieve policy goals since credit accession is a way bigger problem for Turkish companies.
 Originality: To my knowledge, this is the first article ever written specifically examining the efficacy of interest subsidies in Türkiye, although there were many studies focusing on investment incentives in general.