Cohesion Policy Meets Heterogeneous Firms

Loredana Fattorini, Mahdi Ghodsi and Armando Rungi

Article in a refereed journal
Journal of Common Market Studies, Volume 58, No. 4, 2019, pp. 803–817

download / view (external link)

In this paper, we empirically test the effect of the EU Cohesion Policy using a unique dataset of 273,500 European manufacturing firms, combining regional policy data at NUTS-2 level with firm-level total factor productivities (TFP). In a framework of heterogeneous firms and different absorptive capacity by regions, we show that financing by the European Regional Development Fund (ERDF) aimed at direct investments in R&D is associated with improvement of firms’ productivity in a region, while funding designed at overall Business Support is not. The positive association with RTD spending is stronger in the first quartile of the TFP distributions, i.e., for firms that are least efficient in a region, apparently in line with the priority of the policy, which aims at improving firms’ competitiveness with an eye towards small and medium enterprises (SMEs). We finally argue that considering the heterogeneous distribution of firms’ inefficiencies within a region is crucial for a better design of the Cohesion Policy, better than looking at regional aggregates, to avoid a misallocation of resources.


Keywords: total factor productivity, regional policy, European Union, economic integration, R&D, subsidies

JEL classification: D22, D24, H25, F15, O38, F53

Countries covered: European Union

Research Areas: International Trade, Competitiveness and FDI, Regional Development

ISSN: 1468-5965