Study: EU subsidies boosted wages but not productivity for Estonian firms

Stacks of euro bills (photo is illustrative).
Stacks of euro bills (photo is illustrative). Source: Siim Lõvi/ERR

The sales revenue and wages of Estonian companies that received grants from the European Regional Development Fund (ERDF) grew at a much faster pace than those that did not. However, the direct impact of the support on firms' productivity remained modest, a recent analysis suggests.

For a number of years, Estonia has been receiving more money from the EU's coffers than it has been paying in. Among other things, tens of millions of euros were spent during the last budgeting period on supporting Estonia's small and medium-sized enterprises.

In their bachelor's thesis entitled "Unleashing the Potential of Estonian Firms: An Empirical Analysis of the Impact of ERDF Grants," Linda-Terese Makk and Lotte Vahelaan from the Stockholm School of Economics (SSE) in Riga investigated whether this cash injection really helped the competitiveness of Estonian businesses.

Although the question has been studied in several other national contexts, Estonian researchers have published only a handful of papers on the subject.

"Estonia is a small country that relies heavily on these foreign funds. We wanted to see where these grants actually go and whether they have a real impact. After all, Estonia was still one of the less developed regions during the last budget period. So, these grants were crucial," explained Makk. To this end, he and Lotte Vahelanen looked at a total of 1,435 companies that received support from the European Regional Development Fund (ERDF) between 2013 and 2020.

Vahelaan said that despite Estonia's image as a successful digital country, obtaining the necessary data turned out to be more difficult than they had expected. "We had a lot of data, and really exciting data, however later it turned out that it was not all publicly available," said Vahelaan. In the end they had to settle for data from the e-business register.

In addition, number of the companies' reports were not sufficiently detailed to include in their analysis. This meant that 616 companies, which had received EU support were eventually screened out. Of these, 270 had fewer than 10 employees, and 20 had over 250 employees.

In order to create a point of comparison, Makk and Vahelaan searched the commercial register for nearly 950 companies that were on a par with the companies that had received grants, in terms of their economic performance the year before.

In their analysis, they then looked at how the turnover, number of employees, wages and productivity of the firms that received the cash injection changed after receiving it.

"In business, productivity is certainly one of the most important indicators to assess growth potential across the board," Vahelaan said. However, the authors of analyses carried out in other European countries have reached conflicting conclusions in this respect, when assessing the potential impact of EU subsidies.

When they analyzed the changes, they found that the subsidies received had a considerable and immediate impact.

For example, the sales revenues of companies, which received them were 9.4 percentage points higher. Similarly, their employment growth was also eight percent faster. "The biggest difference was in wages. It was 56 percentage points higher for the firms that received a subsidy. This may have helped them both to retain skilled workers and to offer more competitive wages. This, in turn, certainly had a positive impact on company profits," said Linda-Terese Makk. Smaller, earlier-stage and younger companies were seen to benefit in particular from the subsidies.

However, Makk and Vahelaan did not notice any significant increase in the productivity of the companies that received support, nor the productivity of their employees.

This may be due to these factors needing to instead be assessed from a longer-term perspective. It takes time to train new employees for instance. "We looked at it a year and two years after companies received the grant. Certainly, if we were looking at the longer-term effects, these results would probably be different. In terms of policy making, it would be more important and very interesting to see what happens after five years," Vahelaan said.

She also added that, in the long term, the viability of businesses depends on a number of external influences, such as economic cycles, which have been affected recently by the coronavirus crisis and the war in Ukraine for example. "In addition to these external factors, how effectively a company is managed is also important of course. Our analysis makes it possible to assess how well the company was able to implement the support funds. [However], further analysis is needed to assess the long-term performance of the investment," said Vahelaan.

Overall, Makk and Vahelaan assessed the impact of the subsidies up to now as positive. "We were very happy to see these results, because they were exactly in line with the European Union's objectives: to improve job opportunities and working conditions, and to encourage entrepreneurship in a way that makes firms more competitive," said Makk.

However, he said, they also saw that the support schemes could be improved. For example, large companies had a much higher of receiving support funds from the Regional Development Fund than smaller firms. "If anything ought to be changed, it should be to improve access, in particular for small businesses, so that it is the smaller companies that get a boost. We also think that the reporting requirements should be strengthened and transparency should be increased," Makk added.

Persistence pays off

Although obtaining the data required for the analysis proved more difficult than expected, Vahelaan and Makk encourage students to aim high, even at undergraduate level.

"It's difficult for an individual student to reach someone at national level and get hold of the data. However, if you are interested, people are really helpful. But to do this, you have to be proactive and, if necessary, call them several times," Vahelaan suggested.

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Editor: Michael Cole

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