The impact of public subsidies on investment and growth: Policy about evaluation, selection and monitoring

Abstract

Public subsidy, a frequently applied tool of economic development is often provided to the business sector assuming that it promotes investments, employment, and income generation. In this paper a micro economic model based empirical analysis is presented that shows the possible impact of public subsidy on economic growth. The outcomes are derived by investigating the investment decision of the enterprise with and without public subsidy. It is demonstrated that public subsidy may increase social welfare, but under certain circumstances it also may decrease it, partly because authorities deciding about them fail to consider the information on the investment projects that determines the outcome. The empirical analysis of corporate subsidies proves that both cases occur. The number of firms that performed well and presumably had not enough own resources to fund the investment was less than 10% of all subsidized firms. The programs had an overall negative impact on economic growth. We provide recommendations on how methods of evaluations, project selection and monitoring should be modified to achieve better results of subsidy programs.