This time I talked with László Kállay, associate professor of the Institute for the Development of Enterprises. In recent years, his main fields of research have included the moral risks of state subsidies. Many would argue that the development of Hungary’s Small and Medium-sized Entreprises (SME) sector is hindered by the fact that SMEs lack capital and for that reason, it is state subsidy (or the recapitalisation of SMEs) that would give an impetus to the sector’s development. A related fact is that a key tool in the government’s current development policy is that of non-refundable aids. A government decree specifies that a priority for the use of EU development funds is the support of direct economic development.

The question is how successfully and efficiently state subsidy can function. László employs a micro-approach model to investigate the solutions opted for by enterprises that receive such external funds. Non-refundable state subsidy is not “free money” or interest-free loan, but a resource that has a “negative price” as it is not to be paid back. A management-focused problem is that in such a situation the profit of investment projects becomes dissociated from the personal profit of the entrepreneurs or company managers, as the entrepreneur gets something but is not supposed to give anything in return. To put it in another way, such subsidies make companies that otherwise would be loss-making profitable on paper; that is, an income is recognized that would not have been generated without subsidies. We fool ourselves.

In terms of economic policy, it is of paramount importance whether any government commits itself to the decision to support efficiently operating and, possibly, profitable companies, that is, to ensure that market principles are taken into consideration when subsidies are awarded. Yet another aspect to be taken into account is the way efficient and profitable companies use such subsidies, in other words, whether they create added value or not. Such a complex economic policy decision that is positive from a normative point of view would require the decision-makers to be properly informed. It would also necessitate a will to ensure that the EU funds are not only spent but also have a tangible effect on economic development. László emphasizes that a basic prerequisite for such a will and for proper information provided to the decision-makers is the compilation of impact assessment studies before the set-up of a subsidy system.

Let’s take a deep breath and see behind “what would be good”. Let’s look at the consequences of the current practice. As shown by László’s research results, non-refundable government subsidies disbursed in an inadequately prepared manner have immediately perceivable short-term consequences as well. Decisions made by the affected entities of the corporate sector reflect the fact that they “have become accustomed to” state subsidy, and adjusted their activities to its accessibility. The competitiveness of such companies fails to improve.

László would be happy to see experts of modelling participate in the work on this interesting research area, so that he could investigate the effects of non-refundable state subsidies in other fields of the corporate sector. The issue may be of relevance to researchers of corporate financing, as currently non-refundable state subsidy is granted at such massive scales that it influences the operating conditions of corporations to a degree that is of macroeconomic significance. László would be pleased to examine the large-scale macroeconomic effects of the phenomenon in cooperation with researchers of macroeconomics. Researchers of corporate strategy may also find that this field of research is linked to their own, as it is perceptible that affected companies no longer develop their products (completely) for the market, but make attempts to utilise funding application opportunities. Moreover, specific problems arise as far as the adequate accounting for such state subsidies is concerned.

This field of research is of interest to many of us. László expects or hopes that his research will ensure that a number of such analyses will be channelled into the government’s decision-making practice, so that subsidies bring about the growth of corporate competitiveness.

Miklós Kozma
Department of Business Studies