Available online 24 September 2022, In Press, Corrected Proof
This paper investigates the effects of EU-funded firm grants in Hungary.
Grants generated new investment and led to higher labor productivity because of increased capital intensity.
TFP and the share of skilled workers did not increase, in line with limited technology upgrading.
The cost of creating jobs with this program was equivalent to 3 years’ average wage.
This paperinvestigates the effects of non-repayable enterprise grants on Hungarian SMEs, financed from the European Union’s Structural and Cohesion Funds between 2004–2014. Comparing firm- and worker level outcomes of successful and unsuccessful applicants, we find that subsidized firms increase their employment, sales, capital-to-labor ratio and labor productivity, but we find conflicting results for total factor productivity. The skill composition of workers is not affected by the grant, but wages increase, although only for skilled workers and especially managers. These results suggest that the program generates additional investment, but that investment leads to limited technology upgrading at best. According to our simple calculations, the cost of creating an additional job with this program was equivalent to 3 years average wage and each year’s grants contributed to aggregate SME labor productivity growth by 0.2-0.6 percentage points — with an annual cost often in excess of 1 percent of total SME value added.