Abstract
In this paper, we use plant level data on the start-up size of new plant entries and detailed information on the grants received by such plants in order to investigate whether grant receipt encourages plants to start-up with more employment than without support. The data relate to manufacturing plants in the Republic of Ireland, where industrial policy has a long history of using discretionary grants to encourage employment growth. We use a matching procedure to deal with the issue of selectivity into grant receipt and a quantile regression estimator to allow for different effects of grants on plants depending on their position in the start-up size distribution. Our results provide evidence that grants do indeed encourage plants to start-up larger. We also find that this effect is generally higher for foreign than for domestic plants and that it differs for plants at different quantiles of the start-up size distribution.
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Notes
Another important effect of such financial constraints may be that potentially viable businesses do not start up at all. Since the data used in this paper only cover plants that began to operate, addressing this issue is beyond the scope of the current paper.
Previous analyses of similar government assistance scheme generally focus on effects of assistance on plant survival, growth and productivity. See, for example, Girma et al. (2007a, b) for the Irish case as well as Harris and Robinson (2004) and Wren and Storey (2002) for evaluations of the British Regional Selective Assistance scheme.
Authors’ own calculation from the data set described in the paper in 1998 prices. Note that this includes payments made to firms before and inclusive of their year of start-up, i.e. their first year of positive employment.
See Meyler and Strobl (2000) for details.
While regional concerns still dominated in the 1970s, by the early 1980s, a strategic industry approach, encouraging the attraction of multinationals and the development of an indigenous sector in technology intensive sectors, became the primary concern. Nevertheless, regions always remained of at least some concern.
In the very early years, grant provision was under the authority of the Underdeveloped Areas Board before this responsibility was taken over by the IDA.
After 1998, Forbairt became Enterprise Ireland as a consequence of a merger with the Irish Trade board.
While, arguably, plants with lower foreign ownership should still possibly be considered to be foreign owned, this is not necessarily a problem for the case of Ireland, since almost all inward foreign direct investment has been greenfield investment rather than acquisition of local firms (see Barry and Bradley 1997).
For plants where the first year of employment does not fall within our sample period frame, we use information on the start-up year to determine the length of its existence.
Grants are generally given before start-up and not afterwards as we were assured in discussions with Forfás.
We did also experiment with using employment in the second year as an indicator of size, and results were not always similar to the results for first year employment in the sense that many previously significant coefficients on our grant measures were no longer significant. However, two aspects speak against this alternative measure. Firstly, nearly 10% of total start-ups had already closed down by the second year and thus needed to be dropped from the sample. Secondly, also many of our other explanatory variables were also no longer significant, suggesting that employment in the second year was not related to determinants of the actual start-up year.
More accurately, the level variable is defined as the natural log of the amount plus one in order to allow for zero grant receipts.
The manufacturing sector is broken down into 12 sub-sectors: Non-Metallic Minerals, Chemicals, Metals & Engineering, Food, Drink & Tobacco, Clothing & Footwear, Textiles, Wood Products, Paper Products & Printing, Peat and other Mineral Extraction and Other Manufacturing.
The matching is performed in Stata Version 7 using the software provided by Sianesi (2001).
Additionally quantile methods provide a more robust and efficient alternative to least squares estimators when the error term is non-normal. As can be seen from Fig. 1, this may be an important feature of our data as (logged) plant level start-up size does not appear to be (log) normally distributed. This is further confirmed for both groups using the Shapiro–Wilk test, which decisively rejected normality of the data.
Our choice of the lowest quantile, i.e. 0.20, was dictated by the nature of our data set. For quantiles lower than this, the lack of variation in start-up size meant that adequate convergence using maximum likelihood methods could not be reached.
One should note that matching does not necessarily have to be restricted to one type of matching.
Harrison and McMillan (2003) have recently provided evidence that in Cote d’Ivoire, only domestic firms face financial constraints. This is intuitively plausible, as foreign firms have many means of financing their operations, not least foreign direct investment, i.e. capital transfers from the parent company. Hence, they are less likely to be reliant on the domestic capital market.
We set grant amounts of zero equal to one in order to ensure their inclusion once we transformed the variable into its natural logarithm.
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We are grateful to Forfás for the provision of the data and to two double-blind peer reviewers and the editor, Hamid Etemad, for very helpful comments on an earlier draft.
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Girma, S., Görg, H., Hanley, A. et al. The effect of grant receipt on start-up size: Evidence from plant level data. J Int Entrep 8, 371–391 (2010). https://doi.org/10.1007/s10843-010-0061-y
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DOI: https://doi.org/10.1007/s10843-010-0061-y