Efficiency Analysis of Subsidies for Investments using Stochastic Frontier Analysis: Case of Serbia

Abstract

Historically, a great number of countries worldwide used subsidies in order to promote or protect specific economic sector. With the process of globalization, Governments also began utilizing subsidies with the intent of attracting foreign direct investments. This practice has remained until today, when many countries, including Serbia, still use subsidies and other instruments (e.g. tax incentives) in order to encourage both foreign and domestic investments, increase employment and accelerate regional and technological development. Challenges and questions about optimal institutional design, minimal criteria that investors have to fulfill, optimal level of subsidies remain the same. Bearing in mind the increase in expenditures on this type of subsidy in Serbia, there is a need to assess the efficiency of this policy. In this paper, it is done usingΝstochasticΝfrontierΝanalysisΝ(SόA)έΝToΝtheΝextentΝofΝtheΝauthors’Νknowledge,Ν this is the first paper in which stochastic frontier analysis is implemented in an attempt to capture inefficiencies of subsidizing policy. The results show that there were potential budget savings that could have been achieved. In other words, there were some investment projects that were overpaid by the Government of Serbia. In addition, we believe that framework established in this paper could be used as a guide for future policy practice. In the end, suggestions are given for further research which would give broader and more precise results.