Globalization and the Politics of Subsidies

State subsidies to attract investment have proliferated since the 1980s, yet we know little about the factors that influence governments’ subsidy policies. In this paper, I propose that in making subsidy policies, governments are influenced by capital mobility and domestic political institutions. Capital mobility influences subsidy levels in two ways. First, mobility increases the bargaining power of capital vis-à-vis governments in negotiations over subsidies, and, second, the ability of companies to move across borders triggers competition among neighboring countries, thus driving subsidy levels upwards. I argue, however, that the likelihood of governments to respond to the pressures from mobile capital will be higher in countries with electoral institutions that encourage personal vote-seeking, such as small district magnitudes and low political party discipline. The empirical analysis of subsidy levels in the EU member states during the period 1992-2006 lends support for these arguments.