Do EU Funds boost productivity and employment?: Firm level analysis for Latvia

This paper investigates the effects of spending the European Regional Development Fund (ERDF) on productivity, employment and other performance indicators of Latvian firms. After controlling for the fact that more productive and larger firms are more likely to benefit from ERDF resources, we find that participation in projects co-financed by the ERDF increases firms’ employment, turnover and capital stock per employee immediately, while it raises their productivity only three years after the launch of such projects. Furthermore, participants that were initially less productive, larger, less capital intensive and more financially leveraged enjoy larger productivity gains. Also, financing capital investment through the ERDF does not result in any productivity gains compared to the case when it is financed through private funding. However, it results in a larger increase in employment, which is possibly partly due to the firm’s plan to increase employment being one of important criteria for selecting the ERDF beneficiaries.