Do investment incentives affect the performance of domestic and foreign firms differently? Evidence from Czech manufacturing firms

Abstract

This study evaluates the effectiveness of public incentives in improving firm competitiveness, with a focus on the nationality of firm ownership as a distinguishing factor. Using panel data of incentivized and non-incentivized manufacturing firms in the Czech Republic from 2005 to 2019, we investigate the impact of the Czech investment incentives scheme on domestic and foreign firms' productivity, outputs, profitability, investment, and employment level. The analysis, which is based on a combination of propensity score matching with a difference-indifference technique estimator, reveals the presence of a substantial difference in the impact of the investment incentives between domestic and foreign firms. We find that access to the incentives has a negative effect on the output and employment of domestic beneficiary firms. In contrast, the results suggest that foreign recipient firms have a higher output and employ more physical capital and labor after receiving the incentives. Nonetheless, the results show that the incentives have no statistically significant effects on the profitability and productivity of both domestic and foreign firms. These findings are not sensitive to the matching methods employed.