Should governments continue to subsidize selected individual businesses?

 In Industry News
Coins in a Preserving Jar

Coins in a Preserving Jar

All governments in all countries, regions and major cities are subsidizing individual businesses. Not by placing orders with the companies and using their products and services, but by enrolling them in limited business development programs sponsored with public funding from general taxation.

The noble objectives

The official objectives of these activities are job and wealth creation in the individual country, region or city. More jobs will help fight unemployment, lower government spending on social security, increase the total level of income, increase taxes and have a positive impact on wealth and welfare. All very noble objectives that few will argue against.

The three areas of subsidization

The subsidizing activities are organized into three main areas:

  • Entrepreneurship and innovation with the objective of supporting the creation of new businesses (build, sell and support here).
  • Export promotion with the objective of expanding the markets for domestic businesses (build here – sell and support here and there).
  • Foreign investment attraction with the objective of having foreign companies locate some of their activities in the country, region or city (hopefully build here, but at least sell & support here).

Although the world around us has changed dramatically since the invention of the Internet, the tax financed programs supporting the three activities

areas have basically stayed the same.

The two questions that I will discuss in this post are:

  1. Are the tax financed programs subsidizing selected individual businesses a good thing for the economy?
  2. Have the changes in technology and communication also changed the opportunities for startups, export ventures and foreign investments?

Often the incentives are allocated to supporting programs where selected businesses are offered subsidized services instead of direct cost reimbursement. Such programs can be representation, entertainment, consulting, trade missions, educational activities, lease holds (incubation centers and technology clusters), study tours, meetings, conferences etc.

The process

What happens is this:

Are the tax financed programs subsidizing selected businesses a good thing for the economy?

Being an economist the answer to this question is a clear NO.

Markets are distorted

Distorting the market mechanisms by subsidizing some companies is never an optimal way of allocating resources. A few random companies will receive incentives, but most will not. It is objectively impossible to ensure that the funds are allocated to the best possible companies, simply because we have no control over who decides to apply.

The overhead has no value

A selective incentive program must be promoted, managed and governed. There is no value add in these activities. As soon as an organization is established then promoting, managing and spending the tax funded incentives becomes its prime objective. The success criteria always get distorted towards the activities and ensuring that the funds allocated are exhausted.

Distortion of focus

The focus of the participating companies is deviated towards the application process and getting the incentives rather than on their own primary business objectives. We risk making the applicants “addicts” and then making them suffer from the “death of initiative” resulting from too much dependence on government incentives (no incentive = no action).

Always positive evaluations

The evaluation reports done by external consultants tend to always be positive since they are mostly commissioned and sponsored by the same bureaucracy. At least the executive summaries are positive, while unavoidable concern is embodied somewhere in the 200 pages of detail that nobody ever reads.

The official objectives are to create jobs and increase exports. However, there is no meaningful way of measuring if the companies receiving the incentives are more effective than they would have been without the incentives and if those companies that do not apply for incentives are more or less successful than those that do. Obviously such measurements are made by external consultants, but I have yet to see a proper statistical analysis and an outcome that is somewhat significant. Success stories are always only anecdotal.

What about the Internet?

Let’s take a look at exports.

When I started in business more than 30 years ago there was no personal computer, no Internet, no social media platforms, no smart phones and no local or global GSM networks. If I wanted to start business activities in foreign markets I would have to invest in time-consuming travel to the markets that I considered. I would have to visit exhibitions and call on industry organizations to get the information and contacts needed to assess the markets and start my activities.

Today is very different.

From my desk I can search the Internet for the information I need. I will most likely find it and I can reach out to anybody using Skype or a webinar platform to discuss market issues and business opportunities. Before making the first (still time consuming) trip I will be able to know much more and have made initial individual contacts. Why would I need a government incentive to do that and why would I need a civil servant to help me?

In Denmark you can apply for export incentives (and very likely get it) only to employ the commercial attache of an embassy to find information and contacts that you can easily find yourself through the Internet. The commercial attache is competing with specialized local services providers that can deliver much higher quality of information. Why?

I understand the value of Trade Missions fronted by government VIPs (presidents, royalty, ministers etc.) penetrating businesses controlled and/or managed by foreign governments. I also understand that such trade missions have value for the nations with little democratic tradition seeking legitimization from such visits. However, I have a very hard time comprehending what value a trade mission can provide the SMB (small and medium sized businesses) segment looking for partners and customers in foreign SMB or even enterprise segments.

Within less than a day I can – through the Internet – find providers all over the world offering all sorts of training and business development services. If I need to learn how to develop my value proposition or optimize my business model for a certain foreign market it will not take me more than a few minutes to find someone who can help me. I don’t even have to be in the same location as my service provider. Internet based collaboration platforms will allow me to interface remotely with the knowledge I need.

Why do governments have to provide or sponsor such services that are readily available on the market?

The only answer to the questions above that I can come up with is this: Because they have done so for a long time and those (the politicians) providing the tax funds don’t really understand what’s going on and the changes that have taken place. The organizations managing the incentives do not have an objective interest in seeing the changes and adjusting accordingly. They may well lose their jobs.

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