COUNTRIES SUBSIDIZE INVESTMENT: Empirical Evidence

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Table 2: Regional Incentives in Europe
Another study which sheds some light on the relative empirical importance of employment and investment subsidies is Yuill et al. (1994). This study is more limited by the fact that it only covers regional policies in a sample of EU countries and only the three or four most important programmes for each country. The study has the advantage, however, that the data is country.
Table 2 shows that, while in nearly all countries under consideration, investment promotion plays an important role, significant programmes directly subsidising labour are reported for three countries only. Table 3 shows the expenditure shares of investment and employment subsidies. Here, it turns out that, even in those countries which do have employment subsidies, expenditure on investment promotion is much more important, with the exception of Italy.
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European Regional Policies thus also place emphasis on investment rather than employment subsidies.

An important case of a substantial government subsidy programme, which has received considerable attention among economists, is the transformation of Eastern Germany after reunification. Table 4 gives an overview over the budgetary cost of the most important subsidy programmes for Eastern Germany.4 Here, it turns out that over 90% of the expenditure takes the form of investment subsidies whereas programmes directly promoting employment are almost negligible. The figures given above mainly include subsidies for on-the job training and support for the employment of special groups, such as immigrants of German origin from Eastern Europe. Explicit and general wage subsidy programmes aiming at reducing the cost of labour in Eastern Germany do not exist.

Table 4: Subsidies in Eastern Germany 1991-1994, Million DM
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Eastern Germany is thus a striking example for the dominance of investment subsidies relative to measures directly promoting employment.

In summary, the empirical evidence given in this paragraph suggests that the preference for investment over employment subsidies is a reasonably general phenomenon. This raises the question of how the dominance of investment subsidies can be explained. Possible answers to this question will be discussed in the following paragraph.