IMF Working Papers

A Bitter Aftertaste: How State Aid Affects Recipient Firms and Their Competitors in Europe

By Luis Brandão-Marques, Hasan H Toprak

December 16, 2024

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Luis Brandão-Marques, and Hasan H Toprak. "A Bitter Aftertaste: How State Aid Affects Recipient Firms and Their Competitors in Europe", IMF Working Papers 2024, 250 (2024), accessed December 16, 2024, https://doi.org/10.5089/9798400295706.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Industrial policy is once again at the forefront of the policy debate around the world. However, state aid is a contentious issue in the European Union given the need to maintain a level playing in its single market. This paper estimates the effects of state aid between 2016 and 2023 on listed nonfinancial firms in Belgium, France, Germany, the Netherlands, Spain, and the United Kingdom (until 2020) using a high-frequency identification approach to address endogeneity. It finds that firms that receive state aid increase employment and revenue, but not investment or labor productivity. Moreover, it finds that there are adverse spillover effects to competing firms that significantly undo any positive own effects. These findings suggest that, should there be a case for providing state aid to firms in the European Union, this should be done at the European level instead of the member state level to mitigate adverse spillovers. Pooling resources and competitively allocating aid across the Union could preserve market competition, encourage firm entry, and ensure a more efficient distribution of funds.

Keywords: Firm performance, Industrial policy, Spillovers, State aid

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