Business Subsidies and Bureaucratic Behaviour - A Revised Approach

This dissertation is a collection of three studies whose central theme is the business subsidies policy implemented in Finland during the 1990s by the ministry of Trade and Industry (KTM). The purpose is to examine whether the policy is effective and at the same time explain the rationale behind it. The first study measures econometrically the impact of business subsidies on the growth of value added of firms. The results indicate that the impact is positive but extremely low considering the amount of subsidies spent. This in turn raises questions on the effectiveness of the business subsidies policy currently in force. The second study surveys other evaluation studies of business subsidies that were conducted in Finland and abroad. The methods found in the surveyed studies are associated with the results produced. When primary data are utilised (estimates of impacts are taken directly from the subsidised firms) the results are positive. On the contrary, when secondary data are used to measure impact and scientific methods are applied, the results lean more on the negative side. If impact studies on business subsidies suggest ineffectiveness why is such policy still adopted? The third study attempts to answer this question by approaching the problem not from the demand side (the recipient firms) but from the supply side (the organisation designing and distributing the subsidies to firms). It tests whether the behaviour of the KTM's civil servants, when distributing business subsidies to firms, is in line with William Niskanen's (1971) bureau budget maximising theory. The empirical results support the theory on some accounts.