European Union Funding and SME Competitiveness: Do Public Grants Produce Sustainable Private-Sector Growth?

Abstract

Public grants to small and medium-sized enterprises constitute an important component of European Union cohesion, innovation, digitalization, regional-development, and competitiveness policy. Governments justify these interventions through market failures, financing constraints, regional disparities, and innovation externalities. Yet the central policy question is not whether recipient firms spend grant funding or complete subsidized projects. It is whether public support creates economic activity that would not otherwise have occurred and whether the resulting improvements persist after the subsidy ends. This paper examines the effects of EU grants on SME investment, sales, employment, productivity, innovation, and long-term competitiveness. The literature produces a nuanced conclusion. Grants frequently increase investment, assets, turnover, employment, and innovation, but effects on total factor productivity and long-term competitiveness are less consistent. Stronger causal evidence identifies substantial positive effects from targeted research and innovation grants, particularly among younger, smaller, financially constrained firms. Other evaluations show that poorly targeted schemes can finance firms that would have invested anyway or generate little measurable additional performance. The paper argues that the relevant distinction is therefore not grants versus no grants, but grants that relax genuine constraints versus grants that subsidize commercially viable investment that would already have occurred. Sustainable policy should emphasize additionality, competitive selection, productivity rather than expenditure, complementary managerial capabilities, private co-investment, and evaluation against credible counterfactuals.