In eastern Germany, public subsidies have been used to stimulate R&D investment in structurally weak regions. Recent research shows that such subsidies can indeed increase gross value added and productivity in the private sector (Dettmann et al., 2016). But the effectiveness of public subsidies also depends on the right combination of an educated workforce, a supportive regulatory environment, and demand for new products.
One important insight gained from the recent globalization period is the importance of integrated markets for productivity growth.3 On the one hand, international trade linkages and foreign direct investment allow technological advances to diffuse, thereby boosting productivity. On the other hand, firms which are small and insufficiently productive cannot shoulder the fixed and variable costs of market entry.