MONTHLY REVIEW OF ACADEMIC LITERATURE ON RESEARCH AND INNOVATION AS SOURCES OF GROWTH 1. Public subsidies, TFP and Efficiency: a tale of complex relationships

A growing amount of literature investigates the contribution of subsidies to productivity growth and increase in competitiveness of firms. Understanding of the impact of the subsidies on regional productivity growth is essential for the assessment of the effectiveness of public policy. This paper evaluates the impact of subsidies on technological progress, allocative efficiency and economics of scale of granted firms. Authors used a quasi-experimental approach (Multiple RRD), which allowed capturing the causal effect of the subsidies on TFP and its components. The research is based on the data collected from firms, which were subsidised through the Law488/92, a key policy instrument for reducing territorial disparities in Italy during the period 1996–2007. The main findings indicate that capital subsidies negatively affect TFP growth in the short term. Positive effects appear only after 3–4 years. Furthermore, the positive impact comes through technological change and not through scale impact change, as may have been expected. The main channel of the impact of capital subsidies on TFP is through increasing the technological content of the new capital, which comprises the technological upgrade of the subsidized firm. This evidence supports Schumpeterian effects of subsidies on regional growth.