Investment and Employment Subsidies: Empirical Evidence

In this section, we present some empirical evidence about the role of investment and employment subsidies in industrialized countries. Somewhat surprisingly, there are few empirical studies trying to assess quantitatively the relative importance of these two types of subsidies. In the following, we discuss the results of three different studies. Firstly, on the basis of data collected by the OECD (1996), we consider the structure of aggregate general public support to industry in the OECD countries. Secondly, we use a report on regional incentive programmes in Europe (Yuill (1994)) to illustrate the role of capital and employment subsidies in individual European countries. Thirdly, we briefly consider the case of East Germany. In all cases, regional or sectoral subsidies are analysed. Subsidisation of employment and investment is measured relative to the general tax and social security system in the various countries under consideration. Our approach thus identifies how policies for specific sectors or regions are designed.
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Table 1: Subsidies to Industry in the OECD, Net Cost to Government, Million US-$

The most comprehensive study of public support policies is provided by the OECD (1996). This study covers 1552 public support programmes, all aiming at the manufacturing sector, in 24 OECD member countries, the Slovak republic and at the EU level. The study classifies the subsidy programmes, among other things, according to “policy objectives pursued” and “economic activities supported”. In this classification, 40% of all subsidies can be assigned to the groups of employment or investment promoting policies. The remaining 60% mainly comprise research and development and export promotion subsidies, which cannot unambiguously be considered as supporting specifically either employment or investment. The absolute and relative shares of investment and employment subsidies of the remaining 40% of overall subsidies are reported in table 1.

It turns out that, between 1989 and 1993, around 87% of these subsidies were directed towards the support of investment, whereas only about 13% were devoted to supporting employment. In absolute terms, expenditure on investment-promoting measures in the OECD was thus roughly six times as high as expenditure on programmes promoting employment. Even in relation to all subsidies (including the 60% which cannot be classified), programmes promoting investment thus absorbed 36% of overall public support. The authors of the study therefore conclude: “…this (the large share of investment subsidies, C.F./B.H.) shows the extent to which manufacturing investment is an engine of economic development and job creation.” (OECD(1996), p. 9.).