In this paper the impact of various types of state aid on aggregate productivity growth in Belarusian manufacturing is investigated by combining the data on government support with firm-level accounting data for period 1998-2007. Aggregate productivity depends not only on average performance of enterprises, but also on the size of the market share held by efficiently performing enterprises. State aid may influence both components of the aggregate productivity: total factor productivity of a recipient enterprise, its market share and, hence, distribution of resources in the economy.
To evaluate the impact of state aid on aggregate productivity, the author uses Olley and Pakes efficiency decomposition (1996) to measure the allocative efficiency. There is the endogeneity problem in measuring the impact of different types of state aid on aggregate productivity because a counterfactual is lacking and because of selection bias.
To overcome the problem, the author uses the Arellano-Bond (1991) and Arellano-Bover (1995)/Blundell-Bond (1998) methods that are specially designed for analysis of unbalanced panel data which is characterized with small T(time period) and large N (enterprises).
The study will contribute to the literature on evaluating the effectiveness of state aid to industry focusing on the experience of Belarus. Obtained results indicate:
the state aid provided for restructuring truly leads to the modernization of the enterprises (capital-to-labor ratio grows)
this modernization leads to an increase in effectiveness
this growth of TFP allows the newly restructured enterprises to raise their market share which results in the growth of the allocative efficiency
However, when the state aid is provided to support enterprises in financial distress, while it leads to an increase in employment (only for enterprises receiving aid, especially for large enterprises, but not for the total sample) and to an expansion in the market share of large enterprises (not small and medium size), this achievement comes at the expense of the decrease in TFP.