This expertise examines the extent to which the upper limits for location subsidies imposed by the EU to ensure fair competition in the European single market can lead to placing domestic sites at a disadvantage in the face of world-wide site competition. The background of the study is efforts of several countries to attract firms in the semiconductor industry to set up production sites by offering them high subsidies. EU regulations put a cap on locational subsidies, meaning that offers from EU countries to globally mobile enterprises fall short of what countries outside Europe can offer. This increases the danger that companies increasingly shift production to overseas sites.
The study first describes the main features of the semiconductor industry, a dynamic, expanding, highly innovative industry that plays a leading role in the Lisbon-strategy of the European Union. Although the immediate importance of the semiconductor industry is small for production and employment in Europe, the importance of the sector results from the fact that the semiconductor technology is a basic requirement for competitiveness and innovation in other branches of industry. In addition to the production of computers and telecommunication devices, this also includes the wider fields of the entertainment electronics and automobile manufacturing. Also in mechanical engineering and measuring and control technology, micro-electronic products are increasingly being used.
There is no hard evidence that Europe needs its own semiconductor production to ensure an adequate supply. But since spillover effects of the semiconductor industry to related industries often presupposes a spatial proximity, the competitiveness of wider parts of European industry could be impaired if direct contacts between producers of semiconductor technology and their customers were hampered. This holds true in particular for specialised providers of microprocessors (back-end production) but also applies to the manufacturers of front-end products. Production shifts of ancillary industries could damage the economy in Europe. This militates in favour of appropriate incentives in international site competition, at least in principle.
The decisive factor, however, is that under certain circumstances such help is needed in order to induce an undistorted allocation. This is the case if the alternative sites are of different quality, because then competition in locational subsides serves the purpose of selecting the most efficient site. Ultimately, locational subsidies are no more than bids at an auction. True, in terms of distribution policy it would be desirable to limit the competition between sites in order to achieve higher tax revenue from the enterprises. Nevertheless, as long as no functioning global regulations exist, restrictions within Europe for global competition as in the micro-electronics industry will disadvantage only the European sites without offering genuine distribution-policy advantages.
On the other hand, locational subsidies are necessary if strong intra- and interregional spillovers (as in micro-electronics) are to be expected. Here too locational subsidies help in the selection of the most efficient areas. The spillover argument also applies in cases of inner-European competition, since ultimately any EU regulation would prevent the regions from placing their own importance on industry site decisions via their locational subsidies. The danger exists of a misallocation of industrial sites.
All in all, the analysis reaches the conclusion that a general limitation of locational assistance is not justified. Instead, decisions should be made taking into consideration the concrete factors of the individual cases. In the industry under review , the extent to which it is justified to set upper limits on locational promotion, claiming alleged impairment of inner-EU locational competition, should be closely examined. It must also be kept in mind that in light of the short investment cycles in this industry, failing to constantly modernise the production facilities can rapidly result in the European semiconductor industry being shifted completely to competing locations.
Grundig, B. et al (2008): Rechtfertigung von Ansiedlungssubventionen am Beispiel der Halbleiterindustrie, ifo Dresden Studie 45, Munich/Dresden.
Ragnitz, J. et al., „Ansiedlungshilfen für die Halbleiterindustrie im internationalen Vergleich – Europa im Hintertreffen“, in: ifo Dresden berichtet 04/2008, p. 25-32 (Download, PDF, 111 KB).
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