Government incentives and employment in SMEs, an econometric analysis on Turkey's manufacturing industry

From internal regional development to gaining strength in international competition, government incentives are fiscal policy tools that countries implement for many purposes. Turkey changed the focus of incentive programs in 2012 from a sectoral perspective to vanquishing regional disparities. This change brings about opportunities for new studies that could be made on the country's regions and sub-sectors. Most of the studies in the literature on the relationship between incentives and regional development deal with the data of developed countries. Studies on developing countries generally analyze the effects of public support on overall employment in the economy. Therefore, there is a gap in the literature for micro studies based on regional and sectoral differences. This study aims to add to the literature a micro data analysis on Turkish manufacturing SMEs to narrow the mentioned gap. When the performance of Turkey's new incentive program is inspected, the first thing to notice is that the Turkish manufacturing SMEs are struggling to create jobs with the help of state support. Furthermore, the objective of balancing inequalities among firms seems to be far away from being accomplished when a basic inspection is made on enterprises' yearly employment changes based on their regions and sizes. We conducted empirical analyses to obtain a more detailed picture of the relationship between firms' employment and government incentives. The dataset used in our analyses comes from the study of an independent research firm in which Turkish manufacturing SMEs were surveyed. The study's sampling is made on 10 063 respondent firms based on their sectors and regions. In addition to the variables derived from the survey study, we obtained variables from the database published by TurkStat to control for the effects of regional differences. We applied the OLS and for possible endogeneity problems IV approach to analyze the relationship between variables. Our OLS results showed a significantly positive relationship between general incentives and firms' employment. In the IV approach, we found higher coefficients between the variables. We could not find consistently significant results in OLS and IV approaches for employment incentives' effects on SMEs' employment. Lastly, our findings based on firms' sizes revealed that SMEs with 1 to 19 employees employ more people than SMEs with 20 and more employees. Additional factors that we found to be significantly effective on SME employment are firm-level characteristics: age of the firm, the capacity utilization rate of the firm, innovation, machinery level, and information technologies level of the firm.