Do business investment incentives promote employment in declining areas? Evidence from EU Objective-2 regions

Abstract:

To help address the large regional disparities in income that stubbornly persist across Europe, billions of euros have been invested in business investment incentives cofunded through the European Regional Development Fund. Since 1989, these incentives have been spatially targeted through various Structural Funds aimed at promoting economic and social cohesion among all European Union countries. ‘Objective 2’ of the Structural Funds aims to help revitalize those areas with persistently high unemployment and declining industrial production. Despite the continued popularity of these initiatives, no reliable ex-post empirical evidence of their impact is yet available to help EU policymakers refine future geographically targeted economic development policies. To begin to address the void, this article uses unique firm-specific data available for northern and central Italy to estimate a parametric difference in difference model that calculates the employment impact of the ‘Objective 2’ area business incentives net of all changes due to economic trends that are exogenous to the programme intervention. Mean impact results show that the incentives did promote positive employment growth in the target areas that would not have otherwise occurred. The analysis further finds that the incentives were most effective when targeting production in province–industry pairs that had the least severe declines during the years prior to the programme intervention.