Public money and private investment in unlisted firms: The within-firm evidence

Governments around the world regularly hand out money to small businesses, hoping to spark growth, create jobs, or encourage innovation. But a persistent question haunts economists and policymakers: when a company receives a grant, does it actually spend that money on new equipment, factories, or research? Or does it simply use the public funds to pay off old debts or cover daily bills, leaving the company's own cash to do the heavy lifting of investment? This dilemma is known as the problem of "additionality." If the government money is truly additional, it should cause the company to build more than it would have on its own. If the money is fungible—meaning it is interchangeable with the company's own earnings—the grant might just replace what the firm would have spent anyway, resulting in no net gain for the economy. For decades, researchers have tried to answer this by looking at whether companies that apply for grants grow faster than those that do not, but this approach often misses the specific mechanics of how the cash is actually used.

A researcher in Italy decided to look at the problem differently. Instead of asking if a company is on a government list, they asked what happens to the money itself once it arrives. They gathered a massive dataset of nearly ten thousand unlisted Italian firms, tracking their financial records from 2015 to 2024. In Italy, companies are required to file detailed annual accounts that explicitly list any government contributions they received as part of their operating income. This provided the researcher with a rare, direct view of the cash flow: they could see exactly how many euros a firm received from the state and compare that number side-by-side with how much cash the firm generated from its own business operations. By placing these two sources of money next to each other in a single equation, the researcher could observe how a company's spending on fixed assets—like machinery and buildings—reacted to a euro of public money versus a euro of its own earnings.

The results challenged a common assumption in the field. When the researcher first looked at the data using standard accounting ratios, it appeared that public money was far more powerful than private money. For every euro of government grant, the data suggested a much larger jump in investment than for every euro of the company's own cash. However, the researcher realized this was an illusion created by the way financial ratios are calculated. When you divide both the government grant and the company's own cash by the size of the company's existing assets, the math can distort the picture, making small grants look huge relative to the denominator. Once the researcher stripped away these ratios and looked at the raw numbers—comparing the actual euros received to the actual euros spent—the story changed completely. They found that a euro of public money moved investment by roughly the same amount as a euro of the company's own cash. The two types of money were treated as identical by the firms; neither was spent more aggressively than the other.

This finding of "fungibility" held true even when the researcher broke the data down into different types of companies, from young start-ups to mature firms. The only time the pattern broke was for a specific group of struggling, capital-heavy start-ups that had no internal cash left to spend. For these firms, which were effectively out of their own money, the government grant was the only thing that allowed them to buy new equipment. In every other case, the money was fungible. The study also revealed that the mere fact of being a recipient of a grant meant very little. A simple indicator that a company received any money showed almost no effect on investment. The real driver was the amount received. This suggests that studies which simply count how many companies are on a government list are missing the point; they are measuring participation rather than the actual economic impact of the funds.

The researcher also tested whether the relationship between money and investment was a simple straight line or something more complex. They used advanced computer learning tools to see if the effect of a grant changed depending on the size or age of the company. They found that the standard linear models used in economics were actually quite good at describing the reality, capturing about eighty percent of the pattern. The remaining complexity was mostly about how companies with very high cash flow reacted, not about the government grants themselves. This confirmed that the simple comparison of public versus private cash was a robust way to understand the issue.

Ultimately, the study concludes that public money is not a magic wand that forces companies to build more than they planned. Instead, it acts as a general relief for the company's budget. When a firm gets a grant, it treats that money exactly as it would treat its own earnings, allocating it to where it is most needed or profitable at that moment. If the goal of a government program is to force new investment, simply giving an operating grant may not be the most direct tool, as the firm will likely use the funds to stabilize its operations first. The research highlights that to truly understand the impact of public support, one must look at the specific euros flowing through the accounts, not just the status of the companies receiving them. The evidence suggests that while public funds do reach the capital account, they do so at a rate similar to private funds, and they do not carry a special "premium" that makes them more effective at driving growth than the money companies earn themselves.