Vertical Industrial Policy in the EU: An Empirical Analysis of the Effectiveness of State aid

Abstract

This paper assesses the effectiveness of vertical industrial policies within the EU. Vertical industrial policy is defined as government support for specific firms or industries (picking winners or supporting losers) and measured by state aid granted by Member States to the manufacturing sectors. This aid is authorized by EU regulations under certain conditions and regularly monitored. This paper uses Member States data on state aid to manufacturing to analyze the extent to which this government intervention affects the growth of Multifactor Productivity (MFP) in manufacturing. The analysis is conducted using both sectoral aid data and horizontal aid, since in many cases vertical aid is disguised as aid pursuing horizontal objectives. We control for the potential endogeneity of state aids policy. The results indicate that vertical state aid contributes positively to MFP growth.

Keywords: State Aids, Multifactor Productivity, Manufacturing Industry, Industrial Policy

JEL Classification: C23, L52, L53, L60, O47