Government-Funded Businesses: An Empirical Study of Romanian Start-Ups

Policymakers consider startups an essential sector of a dynamic and competitive economy. In this paper we assess the outcome of a Romanian program which provided a consistent subsidy to potential startup entrepreneurs. More specifically, we carry out a cluster and discriminant analysis to measure the economic performance of startup companies five years after their inception. The results show that there are three groups of businesses: companies with high capital and operational efficiency, companies with average profitability, and companies with low profitability, with substantial differences in turnover, profits, debt etc. We argue that these differences are attributable in part to the entrepreneur’s human capital and to the attempt to exploit the different fiscal treatment of labor and capital income. We also show that the public grant scheme had no durable impact on employment and on fixed assets, which suggests the presence of a significant crowding out and moral hazard effects.