Understanding the overall economic impact of business subsidies is essential for planning effective aid policies and implementing economic policy measures. A successful business support policy can accelerate economic growth and improve competitiveness. On the other hand, subsidies can, in the worst case, slow down productivity growth.
This research project aims to assess the overall economic impact of business subsidies in light of the theoretical framework and Finnish business data. The project will provide new information on the overall economic impact of business subsidies and their allocation to different companies and industries.
The research project applies the model developed by Acemoglu et al. (2018), henceforth the ABBK model, which enables assessing the welfare effects of different policy measures. Central to the AAABK model is the ratio of high-productivity and low-productivity firms in total output and how different policy measures affect this relationship. At the heart of the model is the allocation of research and development (R&D) inputs, a key determinant of productivity growth.
1. Description of the Finnish support allocation in the frame of reference of the AAABK model
In the first phase of the project, we empirically explore the entire business sector in which we divide companies into groups according to the approach used in the AAABK model. We further use other variables relevant to subsidy allocation efficiency, such as industry, output, productivity, and knowledge intensity.
2. Assessment of the overall economic impact of business subsidies’ using the AAABK model.
A crucial part of this research project is assessing the overall economic impact of business subsidies by adapting and calibrating the AABK model with Finnish data. This research project provides information on the impacts of different policy measures by calculating current and alternative business subsidies’ overall economic impacts using the AAABK model. The analysis provides information on the effect of subsidy allocation on, e.g., economic growth.
3. Influence channels and model expansion possibilities (incl. effects on international competitiveness)
We further explore possibilities for model extensions that would provide useful added value to policy preparation in the Finnish context. As such, the project utilizes a diverse set of parameters of the AAABK model. Different influence channels’ effects can be simulated via their expected impacts on the model’s key parameters.
4. Conclusions and policy recommendations: the overall economic impact of business subsidies in Finland and opportunities for improving the efficiency of subsidy allocation
The project’s final report will be completed in December 2021 and consequently published in the publication series of the Prime Minister’s Office. The main findings will be summarized in a Policy Brief. The project also aims to produce an economic tool to assess the direct and indirect effects of policy measures.
This research project is carried out in collaboration with Etla and VATT Institute for Economic Research.