Investment Grants: Which Requirements Should be Fulfilled?
Mirko Titze, Lutz Schneider
Wirtschaft im Wandel,
No. 11,
2010
Abstract
Since the year 1969 the German government has applied investment grants to improve regional economic development of disadvantaged regions. The support of eligible firms shall enhance its investment activities. Such activities may force a sustainable development of the respective region. One requirement – amongst others – for the grant of this investment support scheme is the firm’s verification of supra-regional sales. The gains resulting from the firms’ export activities lead to additional income for that region, and this stimulates multiplicative (reinforcing) regional income processes. Since the German reunification this instrument has been applied in the new federal states, too. Due to the fact that structural deficits still exist in East Germany investment grants are adopted primarily in the new federal states. Today, some policy decision makers think that the catching-up process of disadvantaged regions is not fast enough. Against this background, the further application of investment grants is discussed controversially. Some criticism tends to the criterion of supra-regional sales. It has been argued that particularly small firms are excluded from this support scheme. However, small firms are considered as key players for regional economic activities. Moreover, firms which are highly integrated in international markets depend on world trade cycles and that might be risky for the respective region. Finally, critics believe that regional actors should be boosted in order to strengthen regional identities in terms of regional buyer-supplier-networks. This article shows that policy decision makers should maintain the criterion of supra-regional sales. Particularly, regions with a loss of inhabitants need gains from supra-regional sales to stabilise their local purchasing power. Otherwise, these regions are strongly dependent on transfer flows stemming from other regions. Beyond that, supra-regional sales indicate the firm’s international competitiveness. Finally, the most important argument for supra-regional sale might be linkages to supra-regional knowledge flows which strongly affect the region’s innovative capabilities.
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Economic Effects of Investment Grants for Water and Sewerage Infrastructure – The Case of Saxony
Peter Haug
Wirtschaft im Wandel,
No. 11,
2010
Abstract
The article deals with the regional economic growth effects of the German “Joint Scheme” for the improvement of regional economic structures (“GA-Infra”). It focuses on water and sewerage projects located in the federal state of Saxony (Germany) during the funding period 2000-2007. Evaluating these projects is important for scientific as well as for economic policy reasons.
First of all, according to general economic theory, the potential direct and indirect supply-side effects of the water and sewerage infrastructure as well as the price effects caused by this infrastructure are relevant for location decisions only to certain branches of the manufacturing industry.
Subsidies for the development of the sewerage infrastructure have been granted mostly according to the growth target of regional policy, i.e. primarily to municipalities with above-average volumes of industry sewage. This finding could not be confirmed for water provision.
A regression analysis (estimating the labour demand of the local manufacturing industry) showed no empirical evidence for any relationship between the changes in labour demand and the amount of GA-Infra funded water and sewerage infrastructure investments. This might be a consequence of the already satisfactory development condition of the infrastructure in question at the beginning of the funding period (“ubiquitous infrastructure”).
According to a survey of local governments conducted by the IWH, these results might be explained by the fact that business customers did not benefit from price reductions despite the GA-Infra funding granted to their local water and sewage disposal providers. Even though there might be some intuitively plausible reasons (decreasing population, no connection fees) for these findings, no effect on firm location decisions can be expected under these circumstances.
All in all, we do not consider the further extension of these funding priorities to be necessary. Especially, the GA-Infra water/sewerage grants should neither be used to mitigate the cost effects of demographic changes or regulation nor to compensate for losses caused by the buyer power of large firms.
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Langfristige Wirkungen des Konjunkturpakets II am Beispiel der sächsischen Kommunen
Peter Haug
List Forum für Wirtschafts- und Finanzpolitik,
2010
Abstract
The article discusses primarily the potential long-term (supply-side) effects of the public investments subsidized by the German „Economic Stimulus Package II“. Considering the allocative aspects, especially the productivity and financing effects of publicly provided capital as well as the factor price effects of investment grants (municipalities are „lured to the concrete“) have to be taken into account. The theoretical problems are supported empirically by the subsidy practice in Saxony and its focus on local consumer goods (sports and leisure facilities) and on not directly economy-related educational facilities (kindergartens, primary schools). From a distributive point of view no interdependence between the financial strength (or weakness) of the municipalities and the amount of their ESPII-grants received could be confirmed empirically. Finally, with respect to the economic short-term stabilization effects of the program a significant increase of the municipal investments – although with a time lag - was found for Saxony.
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What are the Long-Term Benefits of the Economic Stimulus Package II for German Local Governments? – The Case of Saxony
Peter Haug
Wirtschaft im Wandel,
No. 4,
2010
Abstract
This article deals with the question whether the investments subsidized by the economic stimulus package II („Konjunkturpaket II“) do not only have short-term effects on demand but also long-term effects e.g. on local economic growth. As far as the short-term effects are concerned, the case of the German state of Saxony shows – with some delay – a rise in local government´s investments. Hence, the time-lag problem inherent in all governmental spending programmes seems to keep within reasonable limits. Up to now there have been no signs of inflationary price tendencies in the construction sector.
According to - for example - the „new“ economic growth theory, one ought to be sceptical about the long-term effects of the projects supported by the programme: Even for genuine public intermediate goods the withdrawal effects of financing have to be weighed against the positive effects on private enterprise sector productivity. Furthermore, the effects on factor prices caused by the investment grants might encourage the excess use of physical capital in public production.
This sceptical attitude of the theory is confirmed for Saxony by the fact that primarily public consumption goods (sports and leisure facilities) or educational facilities (kindergartens, primary schools), which are of no direct relevance to the local enterprises, are supported by the programme. Investments in vocational training, research and development play only a minor role at the local government level or are explicitly excluded from the programme.
Especially because of the incentives to misallocate public resources it is recommended to rely on unconditional grants in future support programmes. Then the local governments could use the grants for either „investments” in human capital (new [fixed-term contract] hires, qualification) or in physical capital, according to their needs.
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Keeping the Bubble Alive! The Effects of Urban Renewal and Demolition Subsidies in the East German Housing Market
Dominik Weiß
IWH Discussion Papers,
No. 11,
2009
Abstract
German urban renewal programs are favoring the cities in the Eastern part since the re-unification in 1990. This was accompanied additionally by attractive tax incentives, designed as an accelerated declining balance method of depreciation for housing investments during the late 1990s. The accumulated needs for comfortable housing after 40 years of a disastrous housing policy of the GDR era were generally accepted as justification for the subvention policy. But various subsidies and tax incentives caused a construction boom, false allocations, and a price bubble in Eastern Germany. After recognizing that the expansion of housing supply was not in line with the demographic development and that high vacancy rates were jeopardizing housing companies and their financial backers, policy changed in 2001. Up to now, the government provides demolition grants to reduce the vast oversupply. By means of a real option approach, it is ex-plained how different available forms of subsidies and economic incentives for landlords lift real estate values. The option value representing growth expectations and opportunities is calculated as an observable market value less an estimated fundamental value. Empirical results disclose higher option premiums for cities in Eastern Germany and a strong correlation of the option premium with urban renewal spending.
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Soll die Höhe von Investitionszuschüssen an die Einführung von Umweltmanagementsystemen gekoppelt werden?
Mirko Titze
List Forum für Wirtschafts- und Finanzpolitik,
No. 1,
2009
Abstract
Economic policy has to reconcile a very complex set of objectives. Often, there is a trade-off between these policy targets. This paper focuses on objectives related to the improvement of the regional economic structure and the environmental protection. In Germany, regional policy is pursued among other things using investment grants within the Joint Task framework. At the federal state level, the Länder select and support sustainable investment projects. Some federal states have changed their investment support framework and aim for additional political targets such as environmental protection. Politicians in the Free State of Saxony discuss the option to offer an addition to the basic investment grant. This applies to plants that operate a certified environmental management system. Related to this current political debate this paper describes the effects of such regulatory measures. The article shows that under a particular set of circumstances the envisaged regulation actually could lower the overall level of supported investment and therefore would not stimulate the introduction of environmental management systems. Hence both political objectives would not be fully reconciled. The alternative way could be a direct support of environmental management systems as already introduced in selected other Länder.
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The coalition treaty from a fiscal point of view
Kristina vanDeuverden
Wirtschaft im Wandel,
No. 12,
2005
Abstract
After weeks of negotiations the coalition finally agreed on the conditions for their political work. Not surprisingly, the coalition agreement is complex and intransparent – with a multitude of single measures far away from a precise definition. Quantifying the programme and estimating resulting cash flows is currently difficult; official calculations are – if at all – only partly available. Anyhow, the contract will form the basis for economic policy during the next four years; therefore its evaluation by now is indispensable. The thin red line of the agreement – not astonishingly when considering the precarious financial situation of the public sector – is consolidation. However, more than 80% of the consolidation volume results from the revenue side. Though one third of this is due to the cutback of tax exemptions, the lion’s share comes from raising tax rates, mainly the VAT standard rate. In contrast, cutting back public expenditure is minor and the agreement clearly comes short of the Koch/Steinbrück proposal; even new tax reliefs are created. The consolidation is almost completely borne by private households. Enterprises as a whole are barely hit. However, they have to wait until 2008 for a reform of company taxation – one of the most pressing problems in this legislative period. To reduce the companies tax burden until the reform starts the conditions for tax depreciation are temporarily relaxed. Anyway, from an international point of view the statutory tax rate is an important signal to enterprises deciding where to invest. Lowering effective tax rates by changing depreciation conditions is intransparent and, thus, will be less effective. Furthermore savings within the public sector are planned to accomplish consolidation; 10 billion Euro should result from efficiency gains and reduced expenditure. Consolidation measures mainly focus on the budget of the federal government. However, Länder and communities will participate in the additional tax revenues. In contrast, social securities will loose – and therefore also the share of employment that is subject to social insurance contribution. Particularly the unemployment insurance will be burdened by the decrease of its premium rate. Besides, the federal government will reduce its grants to the pension funds and most notably the health system. The contract is dominated by fiscal constraints. Cyclical requirements are considered only cursory and pressing structural reforms are put off. The reforms of company’s taxation, of fiscal federalism, of the health system as well as a proceeding reform of the labour market are only proposed. How and when measures in these fields are realised will determine whether fiscal policy can set a new course.
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Investment Behaviour of Financially Constrained Multinational Corporations: Consequences for the International Transmission of Business Cycle Fluctuations
Diemo Dietrich
IWH Discussion Papers,
No. 165,
2002
Abstract
The paper investigates the investment decision of a financially constrained multinational
corporation (MNC) planning investment projects both at home and in a developing
country. The collateral values of the projects diverge because of country specific
transactions costs so that the willingness of banks to grant a loan depends not only on
the MNCs financial wealth but also on the share of FDI in total investment. It is shown
that i) variations in the MNCs financial standing affects FDI stronger than domestic
investment, ii) FDI is likely to decrease following a macroeconomic shock to the MNC
parent, and iii) domestic investment is likely to increase following a macroeconomic
shock to the MNC affiliate.
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