The causal effects of an industrial policy

Business support policies designed to raise employment and productivity are ubiquitous around the world. We exploit changes in the area-specific eligibility criteria for a major program to support jobs through investment subsidies. Pan-European state aid rules determine whether a sub-national geographical area is eligible for subsidies, and we construct instrumental variables for area (and plant) eligibility based on the estimated parameters of these rule changes. We find areas eligible for business support create significantly more jobs (and reduce unemployment), and this is not due to job displacement between eligible and ineligible areas. An exogenous ten-percentage point increase in an area’s maximum investment subsidy stimulates about a 7% increase in manufacturing employment. The treatment effect exists solely for small firms – large companies appear to “game” the system, accepting subsidies without increasing activity. There are positive effects on net entry of new plants, firm investment but no effects on Total Factor Productivity.