The market implications of industrial subsidies

Governments are increasingly employing subsidies and other types of industrial policies in general (Hasanov and Cherif 2019, Juhász et al. 2023, Millot and Rawdanowicz 2024). This calls for not only quantifying support measures, but also investigating their market implications. The OECD has played an important role in improving transparency regarding industrial subsidies, notably through the recent creation of the OECD MAnufacturing Groups and Industrial Corporations (MAGIC) database (OECD 2025a). In our latest paper, we add to the empirical literature about their effects by estimating causal impacts of government subsidies on the performance of the largest global manufacturing firms using the OECD MAGIC database (OECD 2025b).

Subsidies have ambiguous theoretical implications and mixed empirical outcomes

The impact of subsidies on firm performance is ambiguous in theory. Subsidies can encourage investment by lowering firms’ cost of capital, with potential positive effects on productivity and competitiveness. This, in turn, can help firms gain market shares or boost profitability. However, subsidies may also support inefficient investment or reduce incentives to innovate, especially if paired with protectionist measures.

The impacts of government subsidies on market outcomes can also vary over time and across specific policy tools. For instance, market share gains can be larger in the longer term, if significant differences in production costs lead to sustained losses for competitors and ultimately their exit from the market.

The effect of subsidies on firm performance could also vary because subsidies can be granted for different purposes and be conditional on specific criteria. For instance, R&D tax concessions may boost spending on R&D but not investment in fixed tangible capital, and subsidies targeted at employment may reduce labour productivity. Similarly, one-off support measures to distressed companies during crises are likely to have a different impact on firm performance than ongoing subsidies disbursed in the context of sustained industrial policy strategies.

Ultimately, the impact of subsidies on firm performance is an empirical question. However, econometric evidence thus far tends to vary across studies, which mostly use data for one jurisdiction or one sector only (Aghion et al. 2015, Criscuolo et al. 2019, Branstetter and Li 2023, Brandão-Marques and Toprak 2024). Our recent paper seeks to fill this gap by providing cross-sector and cross-country evidence.

Empirical approach

Our estimations are performed on unbalanced panel data, covering 482 of the largest industrial firms globally in 14 manufacturing sectors over the 2005-22 period (at annual frequency). The exact sample varies across specifications and estimation methods, reflecting data limitations.

The main explanatory variable is total government subsidies as the most comprehensive estimate of government help, assuming that the received subsidies are largely fungible and firms can use them freely. However, to verify potential differences across subsidy types, separate estimations are also carried out for grants, tax concessions and below-market borrowings, i.e. the three subsidy types currently captured in the OECD MAGIC database. We test their effect on various measures of firm performance: changes in market shares, investment, productivity growth and profitability.

We employ two methods to address reverse causality: (1) the traditional instrumental variable approach, and (2) a more recent approach known as generalised propensity scores-based inverse probability of treatment weighting.

We include firm and year (or region-industry-year) fixed effects to remove the impact of unobserved characteristics that are constant over respective dimensions of the sample. However, robustness checks excluding firm fixed effects are also tried. In addition, a few direct controls (specific to each performance indicator), such as firm size, are added to the estimations.

While investigation of lagged and cumulative effects of subsidies is desirable, baseline estimations focus on contemporaneous effects. This is motivated by the relatively small sample as compared with other firm level studies. Using a longer lag structure for dependent and explanatory variables reduces the effective estimation sample considerably. Still, one robustness check is performed by using two- and three year moving averages for the dependent and explanatory variables.

Main empirical findings

On average, across the largest manufacturing firms operating in 14 sectors and numerous countries, total government subsidies:

• increase market shares by an amount that is economically sizeable relative to observed small annual changes in market shares, with an increase of one percentage point in subsidies as a share of revenue corresponding to between the 27th and 51st percentile of the observed distribution of annual absolute market share changes, depending on the estimation method;
• do not seem to have an impact on firms’ investment rate but appear to increase nominal spending on investment, which implies that subsidies do not substantively shift firms’ overall tendency to invest;
• have no or a negative effect on real productivity growth, in line with most frequent findings in the literature that subsidies do not enable firms to become more productive; and
• have no significant contemporaneous impact on various measures of profitability, which suggests that firms generally do not translate subsidies into simple windfall profits.

Given that overall subsidies appear to have no or a negative impact on the investment rate and productivity, the finding that subsidies are associated with increases in market shares does not seem to be explained by efficiency gains. Instead, this relationship could result from the ability of firms receiving subsidies to cover part of their operating costs and lower their prices. This narrative is consistent with evidence that subsidies do not boost profitability.

Effects tend to vary across subsidy types and firm characteristics

For several performance indicators, the effects of subsidies differ across their types, with most frequent and consistent findings for tax concessions.

• Several specifications point to a positive impact of tax concessions on investment levels and rates, productivity, and profitability. These effects can stem from their perceived predictability, in particular if they are part of the tax code, as compared to other forms of subsidies that are often discretionary. Moreover, they generally allow firms to make independent decisions, unlike grants tied to individual projects. Thus, tax incentives could be more conducive to investment and productivity improvements, especially where they are related to R&D spending.
• In contrast, there is some evidence that below-market borrowings lower real productivity growth and profitability. This can reflect the fact that this policy tool at times has been used to support distressed firms. In such circumstances, it is less likely to have positive contemporaneous effects on productivity and profitability. Below-market borrowings may just help firms to survive in the market that would not otherwise have done so without seeking to increase their productivity.

These heterogenous results for individual subsidy types suggest that the effects of government support can differ significantly depending on the nature and design of individual support measures. Where the effects of different subsidy types run in opposite directions, this can also explain challenges with finding significant results for total subsidies.

There is also some tentative evidence about differentiated effects of subsidies across various characteristics of firms. Some of them relate to China-based companies. For instance, the negative impact of below-market borrowings on productivity and profitability is less strong for China based firms. This could be because, in contrast to other countries, below-market borrowings are a systemic rather than an emergency type of government support to companies. They are by far the largest form of government subsidies in China currently captured in the database, as government ownership in China’s banking sector is more conducive to such type of government support (Sauvage et al. 2025, OECD 2024).

Future research

While our paper has enhanced understanding of some market implications of subsidies, continued efforts are needed to improve the transparency and measurement of government support and to broaden the scope of analysis of possible subsidy effects.

Source: cepr.org