Abstract
This paper examines the geographical distribution of regional state aid in Slovakia between 2004 and 2021, while focusing on projects realized in the least developed districts. The purpose is to answer the following research question: how much investment support is provided to areas with high rates of long-term unemployment to promote local economic activity? The investigation was conducted using a spatial distribution analysis and descriptive statistical methods. The findings demonstrate that the level of support in less developed districts is below the level of aid directed into more developed regions not only in terms of the number of supported projects, but also regarding the total amount of aid and the number of created jobs. Out of the 20 least developed districts we monitored, only the results for Košice-okolie significantly outperformed the results of the other districts. This article provides possible explanations for these findings and contributes to the literature by providing insights into the practical application of state aid in Slovakia.
1 Introduction
The regions of the Slovak Republic have always displayed notable territorial differences, mostly in terms of overall economic performance, income levels, and employment opportunities. The European Commission (EC), in its 2022 Slovakia Country Report, stated that while the level of poverty and social inequalities in the country are on average relatively low, disparities among regions are significant – the share of people at risk of poverty or social exclusion varies from 7.9% in Bratislava (located on the west) to 21.7% in eastern Slovakia (EC 2022: 48). Consequently, the EC relates this situation to the job opportunities that individual regions offer: “some regions (e.g., in eastern Slovakia) and social groups (e.g., marginalized Roma communities) remain particularly disadvantaged, for example, because of lower employment rates” (EC 2022: 3).
Elimination of these disparities is, and has always been, one of the priorities of the Slovak government. This priority is confirmed by the government's programme statement, which for 2021–2024: “the Government of the Slovak Republic will strive to reduce poverty, especially in segregated areas in less developed regions of Slovakia.” The document further specifies several ways the government aims to address this issue, such as relying on investment support: “investment support will be directed primarily to less developed regions with the aim of creating jobs in such a way as to distort the business environment as little as possible” (National Council of the Slovak Republic 2023: 52).
It is worth mentioning that since the Slovak Republic is a member of the EU, the provision of investment incentives must comply with corresponding European rules. The basic principle of EU state aid can be described as follows: since a company obtaining government support gains an advantage over its competitors, which is a situation that may distort competition and the functioning of the internal market, state aid is generally prohibited. However, Article 107 of the Treaty on the Functioning of the European Union defines several specific cases in which state aid is allowed. One case, which is relevant for this paper, is the support provided with the aim of facilitating the economic development and employment of disadvantaged areas in the EU – an instrument called regional aid. To ensure that all member states use this tool in line with its purpose and within set rules, the EC has adopted regional aid guidelines (RAG), including annexes identifying the most disadvantaged regions of the EU. In practice, a member state incorporates key elements of the RAG in its national legislation, which sets out the rules under which investment incentives are granted to companies (in Slovakia, the key document is Law no. 65/2022 Coll. on regional investment aid). This way, it is ensured that member states follow essential EU state aid rules while, at the same time, enabling governments to adopt their own competition rules in accordance with European regulation. According to Oman (2000), this regulation on the provision of investment aid in the EU seems to work very well, as there is a clear regulatory framework within which the member states have a certain degree of autonomy; however, there is also a supranational supervisory body, procedures, and sanctions, which are based on judicially reviewable provisions.
Based on the above, it is expected that the Slovak government's priority is to support investment projects mainly in areas that are being left behind, with the goal to boost employment and economic growth and, as a result, reduce regional disparities. However, apart from the official list of projects supported by the regional investment aid, no exhaustive document or any other comprehensive evidence exists that supports this hypothesis. The goal of this paper is to fill this gap and provide an analysis of the geographical distribution of supported projects in relation to the economic development of respective regions. We try to verify whether (and if so, to what extent) regional aid is directed to regions with higher levels of unemployment, and we examine if the investment aid in Slovakia is really used as a tool for regional development – as it is intended based on corresponding EU regulation.
2 Theory and literature review
2.1 Theoretical background on investment incentives
Although the term incentives (or subsidies or state aid) is widely used in the economic literature, it is rarely defined, and if defined, the definitions are usually context specific. One may find definitions that are narrow (more specific) or wide (general) regarding aid's objectives, potential recipients, or forms. The definition that we consider conveniently general but still precise is provided by the United Nations Conference on Trade and Development, which describes incentives as “any measurable advantages accorded to specific enterprises or categories of enterprises by a government, in order to encourage them to behave in a certain manner” (UNCTAD 1996: 11). Another convenient definition is provided by James (2009), who defines investment incentives as “measurable economic advantages that governments provide to specific enterprises or groups of enterprises, with the goal of steering investment into favoured sectors or regions or of influencing the character of such investments”.
Here, we consider it important to note that the topic of investment aid in the literature is often linked with the terms competition and foreign direct investments (FDI) attraction. This link applies especially in related theoretical frameworks and interpretations, as is described next. However, the provision of investment incentives in Slovakia is not limited to inter-governmental FDI competition, as the aid can also be granted to domestic (and already established) investors. Moreover, corresponding EU legislation defines (regional) state aid as a tool to a) “promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment” and b) “facilitate the development of certain economic areas in the EU” (EC 2021: 3). Therefore, in the context of the Slovak Republic, the investment aid scheme should be understood more as an instrument to reduce regional disparities rather than an FDI competition tool. However, the practical use of the state aid scheme by the Slovak government indicates that it is not possible to separate these two purposes. On the condition that the member state follows EU rules defined under the RAG, the country can still use the regional aid mechanism to attract FDI projects and engage within inter-governmental competition. To guide the following presentation on the theoretical underpinnings of investment incentives, we believe it is intellectually useful to understand this phenomenon of the inseparability of investment aid purposes and interpret it both as a regional development and a competition tool.
As part of the theoretical framework overview, we consider it important to briefly classify key theoretical approaches to investment incentives, following the categorization of Thomas (2007), which is in line with Oman (2000) and Charlton (2003). On the one hand, positive interpretations were noted, indicating that the incentives can be an efficiency-enhancing policy tool with the potential to increase the social welfare of the host country (see Brennan – Buchanan 1980; Black – Hoyt 1989; Bartik 1991; Wilson 2005; Blomström 2002; Dreyhaupt 2006). On the other hand, negative (or critical) views exist regarding incentives and related competition. The main opposing argument to the use of investment subsidies is linked to the prisoner's dilemma situation that is created by the dynamics of the competition. As Dreyhaupt (2006) explains, the essence of this dilemma (in our context, FDI competition) leads countries to overpay the investor out of fear of losing the investment. This overpayment leads to inefficiently generous incentive packages (consisting of a higher level of financial support and reduced tax liabilities for companies) at the expense of the domestic economy and provision of public services (Guisinger 1985; Thomas 1997; Lynch 2004; LeRoy 2005).
2.2 Overview of previous research in the area
Extensive research exists regarding investment incentives. In general, the literature can be classified into studies that either examine the incentives' impact on the levels of investments and their ability to attract inward FDI (Barros – Cabral 2000; Oman 2000; Wells et al. 2001; Van Parys – James 2010; Dinga 2011; Ginevičius – Šimelytė 2011; Hsu et al. 2019; Cuervo-Cazurra et al. 2022) or their potential to influence investors' decisions and the allocation of investment projects (Alam – Stafford 1985; Faini – Schiantarelli 1987; Buss 2001; Blomström 2002; LeRoy 2005; Bronzini – de Blasio 2006; Cannari et al. 2006).
Another classification entails the research that focuses on the relationship between incentives and selected socio-economic indicators, which is often related to the incentives' role in reducing territorial disparities. Usually, these studies aim to measure the impact that incentives have on variables such as employment levels, productivity and gross domestic product (GDP) through statistical models (mostly various types of regression analyses). Although this paper relies on different methodologies to study the link between state aid and regional unemployment levels, we consider research examining the relationship between aid and selected socio-economic indicators as the most related to ours. Therefore, the following overview concentrates mostly on this type of literature.
We regard Sungur's (2019) research as the closest research to ours, especially in terms of the methodology and research question. Sungur (2019) investigated whether the new incentive system implemented in Turkey in 2012 was effective in shifting investments from Turkey's developed regions to less developed areas of the country. By examining the spatial distribution of two indicators – investment incentives and investment amounts in 2001–2016 – he concluded that the new investment incentive scheme seemed efficient in shifting investments to less developed regions. The results illustrate, on the one hand, that both examined indicators in these locations have increased and, on the other hand, that both the share of investment incentives and fixed investment amounts in developed regions have decreased.
The Supreme Audit Office of the Slovak Republic (2018) published an analytical report aiming to assess the benefits of investment aid in Slovakia. One of the goals of the document was to evaluate the contribution of investment aid to the reduction of regional differences by examining the development of selected indicators in supported regions (namely GDP per capita in purchasing power parity and the unemployment rate). The report's findings stated that it is not possible to conclude that investment aid reduced regional disparities. However, the report was critical and pointed to the paradoxes of the use of regional aid in the country. For example, the Office concluded that in terms of registered unemployment rates and the amount of regional GDP per capita in purchasing power standards, the two relatively least developed regions (Banská Bystrica, and Prešov) received the least investment aid per capita (Supreme Audit Office of the Slovak Republic 2018). The Ministry of Economy of the Slovak Republic (MoE) reacted critically to the publication of the report, stating that the conclusions are unfounded while questioning the methodology and the overall quality of the analysis (MoE 2018).
Using a differences-in-differences-in-differences (3D) framework, Bělín and Buchel (2022) evaluated the potential impact of investment incentives in Slovakia on the unemployment rates in districts to which the support was directed. They also investigated potential spatial spill-over effects into other districts. Their analysis showed that the effect of support on regional unemployment rates varied according to the level of development of the recipient district. While incentives directed to the least developed districts (LDDs) were associated with a statistically significant reduction in unemployment rate growth in the targeted districts, the study estimated a zero effect of investment incentives targeted to non-LDDs. The positive effect of investment aid in the LDDs was demonstrated within three years from the approval of the support and continued in the following period.
Bobenič Hintošová, Sudzina, and Barlašová’s (2021) study was designed to examine the direct effects of investment incentives on FDI levels and their indirect effect on selected macroeconomic indicators. The authors found a reduction in the unemployment rate through FDI (indirect effect of incentives), also suggesting that while financial incentives, such as grants, have a positive direct effect on FDI inflows, the effect is the opposite in the case of fiscal support.
Using a counterfactual evaluation method, Ambroziak and Hartwell (2018) examined the impact of established incentive schemes and regional development in 14 Polish special economic zones that are located in the least developed areas. Their analysis shows that special economic zones have had a positive impact on addressing regional development issues, while in relatively richer areas, the evaluated effects were weaker.
Hlaváček and Janáček's (2019) study examined whether regionally different levels of government investment incentives (as well as FDI and research and development expenditures) influenced the development processes of regions in the Czech Republic. Their study focused on a wide range of socio-economic areas, examining indicators such as the number of unemployed, job vacancies, the number of companies and several others. The results show that incentives and FDI had a significant influence on the number of small firms, number of building permits, and value of residential buildings. Hlaváček and Janáček considered the observed effects positive in relation to regional development. Another assessment of investment incentives in the Czech Republic, which was carried out by Cedidlová (2013), generally indicated that the provision of investment incentives was effective in most of the studied cases. However, research by Musil and Hedija (2020) identified only a moderate positive link between state support and GDP growth, while the relationship between investment incentives and the output gap was statistically not significant.
Bondonio and Greenbaum (2006) performed an analysis of business incentives and their potential impact on employment levels in Italy. Although the study worked with the data on funds from the European Regional Development Fund, the primary objective of such incentives is basically the same as in the case of national state aid, as described above: to help address regional disparities. The results indicate that the incentives promoted positive employment growth in the target areas that would not have otherwise occurred.
However, Yanikkaya and Karaboga's (2017) findings on the impacts of incentives on sectoral labour productivity, capital intensity, employment, and total factor productivity in Turkey were inconclusive. The estimations show that while investment incentives had no significant positive effect on employment growth and total factor productivity growth, they significantly reduced the growth rate of value added per work hour and capital stock per work hour.
Schalk and Untiedt (2000) examined the effects of regional investment incentives on investment and labour demand in 327 cross-regional units in the manufacturing industry in West Germany between 1978 and 1989. Their results indicate that incentives had positive impacts on employment and investment levels in this period. However, the impact on growth and the convergence of labour productivity was negligible.
3 Data and methodology
3.1 Data sources
This article used official state aid statistics that were published by the MoE of the Slovak Republic. The list of supported projects includes all companies that received state aid in line with the official investment incentives scheme. It is worth mentioning that regional investment incentives in Slovakia can be granted to new and established investors under domestic or foreign ownership. Therefore, the data on provided aid is not limited to FDI; it also covers expansions of existing facilities and projects of domestic investors.
According to Slovak state aid legislation, only the following types of projects are eligible for state aid (and therefore are included in the list): industrial production, technology centres (including projects combining both production and technology centre), and shared services centres. Concerning the specific forms of aid, the data includes support in the form of corporate income tax relief, cash grants, contributions to created jobs, and occasionally the rent/sale of public real estate at a discounted price.
It is also important to define our regions of focus. For our research, we used the official list of the least developed districts that were published by the Slovak Centre for Labour, Social Affairs and Family (2023a). According to Law no. 336/2015 Coll. on the support of the least developed districts, a district is considered least developed when the rate of registered unemployment calculated from the available number of job seekers is higher than 1.6 times the average rate of registered unemployment in the Slovak Republic for the same period for at least nine calendar quarters. Following this logic, we worked with 20 districts – most of which are in the eastern part of the country (the districts are graphically distinguished from the other 59 Slovak districts in Fig. 1 by bold and underlined letters). For simplicity, we also worked with the only district that was removed from the list in 2020 – Vel'ký Krtíš – since it continually registered an unemployment rate almost two times higher than the national average.
Map of cumulative amount of state aid provided (in EUR) and number of approved projects in individual districts of the Slovak Republic, 2004–2021 Notes: BB: district abbreviation; 5: number of supported projects; KK: district included in the list of least developed districts. Source: author, based on data from Ministry of Economy of the Slovak Republic (2022).
Citation: Society and Economy 46, 1; 10.1556/204.2023.00009
An unanticipated finding was observed in relation to regional development in Slovakia while preparing this study. The list of LDDs has been officially published and updated on a quarterly basis since 2015, and it was created as a part of an effort to clearly define priority regions in terms of regional development. One would expect that with efficient use of the regional development tools available to the government, the number of districts included in the list should decrease over time. However, if we compare the list year by year, we can observe an increase in the total number of districts considered least developed, even when the national unemployment rate decreased. According to the official data of the Slovak Centre for Labour, Social Affairs and Family (2023a, 2023b), while the national unemployment rate decreased from 11.74% in 2015 to 5.90% in 2019, the number of LDDs increased from 12 to 20 during the same period. This data indicates that while economic development in terms of the decrease of the unemployment rate was observed on a national level, it was not linked with the development of regions troubled with high long-term unemployment levels, and thus regional disparities only deepened.
3.2 Methods
In this paper, spatial distribution analysis was used to study regional state aid provision in Slovakia and its relationship to the economic development of the regions where supported companies operate (or operated). This approach allowed us to geographically display the state aid that was provided during the researched period and monitor its arrangement in relation to our focus units – which were 20 districts that are considered the least developed regions of Slovakia.
In the first step, we worked with the MoE list on aid provided and assigned information about the specific district to every data entry where the supported project was realized (as this information is missing in the original statistics). Then, we extracted the data regarding what we were interested in – a) the number of supported projects, b) the amount of investment aid in EUR, and c) the number of created jobs. Subsequently, we identified the projects that were realized in the LDDs, as defined by the law on the support of the least developed districts. Based on this dataset, we created a map chart that graphically presents state aid data on all 233 supported projects during the period 2004–2021. Arranging the data in such a map not only helped us to easily interpret the regional distribution of investment incentives in the country, but also to clearly understand the extent of support in respective districts.
As a next step, we listed districts that ended in the top five of the three monitored categories – the number of supported projects, total sum of provided aid in EUR, and number of new jobs. We pointed out when a district included in the official list of the LDDs was placed in any of these rankings.
4 Results
The core interest of our study was to explore the spatial distribution of regional state aid in Slovakia in relation to economic development properties of the districts where supported investment projects were realized. The objective was to uncover whether aid was directed into regions with high long-term unemployment levels to support economic activity and reduce country-wide regional disparities – a persisting issue the Slovak Republic faces since its formation in 1993.
For this purpose, we investigated a dataset of 233 investment projects in the country that were supported by a regional state aid scheme during the period 2004–2021, while focusing on 20 LDDs suffering from high long-term unemployment levels. Before turning to the examination of the results on a national level, Table 1 provides a summary of the regional state aid that was directed into the 20 districts we focus on. Furthermore, it includes information on the ratio of state aid that was directed into less developed districts vs. state aid that was directed into the rest of the country in all three individual monitored indicators (total allocated aid, jobs created, and number of supported projects).
Overview of supported investment projects from the regional aid scheme in the LDDs of the Slovak Republic, 2004–2021
| District from the list of LDDs | Number of supported projects | Total allocated support (in EUR) | Jobs created | |
| 1. | Košice-okolie (KS) | 18 | 150,820,148 | 3,703 |
| 2. | Lučenec (LC) | 11 | 33,643,984 | 1,294 |
| 3. | Michalovce (MI) | 7 | 25,258,789 | 1,311 |
| 4. | Kežmarok (KK) | 6 | 24,201,061 | 890 |
| 5. | Rožňava (RV) | 6 | 17,902,394 | 481 |
| 6. | Bardejov (BJ) | 5 | 14,671,387 | 479 |
| 7. | Rimavská Sobota (RS) | 5 | 12,420,303 | 1,518 |
| 8. | Gelnica (GL) | 3 | 17,838,180 | 642 |
| 9. | Sabinov (SB) | 2 | 880,000 | 33 |
| 10. | Poltár (PT) | 1 | 11,800,000 | 400 |
| 11. | Levoča (LV) | 1 | 3,900,000 | 130 |
| 12. | Medzilaborce (ML) | 1 | 3,532,994 | 150 |
| 13. | Revúca (RA) | 1 | 3,437,500 | 250 |
| 14. | Vel'ký Krtíš (VK) | 1 | 1,750,000 | 70 |
| 15. | Trebišov (TV) | 1 | 220,000 | 15 |
| 16. | Svidník (SK) | 0 | - | - |
| 17. | Vranov n. Topľou (VT) | 0 | - | - |
| 18. | Sobrance (SO) | 0 | - | - |
| 19. | Snina (SV) | 0 | - | - |
| 20. | Stropkov (SP) | 0 | - | - |
| LDDs total | 69 | 322,276,740 | 11,366 | |
| LDDs in % | 29% | 16% | 17% | |
| Slovak Republic total | 233 | 2,027,682,913 | 65,552 | |
Source: author, based on data from the Ministry of Economy of the Slovak Republic (2022).
As can be seen in Table 1, in some of the priority districts, no investment project was supported by the state aid scheme in the last 18 years, namely, in the districts of Svidník, Vranov nad Topl'ou, Sobrance, Snina, and Stropkov. Many other LDDs report, at most, one supported project each. Overall, in 2004–2021, almost one third of all projects (29%) were supported in the regions considered the least developed. The total state aid directed into these districts was 322 million EUR, representing 16% of the sum of regional state aid granted on a country level (compared to 1.7 billion EUR targeted to support projects in developed regions). Furthermore, relatively few jobs were generated by the supported projects, representing only 17% of the values for the entire Slovak Republic.
It is also worth emphasizing the difference in the amount of allocated aid between the first and second most supported LDD – while more than 150 million EUR was directed to Košice-okolie (supporting 18 investment projects), the second most supported district, Lučenec, reported a fifth of this, specifically 33 million EUR for 11 projects.
The results of our spatial distribution analysis are shown in Fig. 1, providing an overview of support in terms of the amount of regional aid in EUR and the number of supported projects, while highlighting 20 LDDs. (Details on the declared number of created jobs are given in the following text.) The darker colour the district in Fig. 1, the higher cumulative amount of support (in EUR) was given, and the value shown under the abbreviation of the district represents the number of supported projects in the given period. At the same time, bold and underlined letters highlight the districts that are officially defined as the least developed.
4.1 Number of supported projects
As illustrated in Fig. 1, between 2004 and 2021, regional aid was granted to companies across almost the whole of Slovakia. Specifically, support was directed to 55 districts, which represent almost 70% of all districts in the country. In relation to regional development, it is positive that the highest number of supported projects was recorded in the district of Košice-okolie (abbreviated as KS in Fig. 1), which is an LDD. Košice-okolie is the area around the second-largest Slovak city Košice (the Slovak word “okolie” means surrounding area). Overall, over the past 18 years, the support has been directed to 18 projects in this district, with the potential to create more than 3,700 jobs. The second district with the highest number of supported projects is Nitra (NR) with 16 projects, followed by Žilina (ZA) and Košice-city (KE), which both report 12 projects. More than 10 investments were supported during the examined period in the districts of Prešov (PO) and Lučenec (LC), with 11 projects each. (Lučenec is considered an LDD.) The remaining districts registered seven or fewer supported projects.
4.2 Cumulative amount of support
The second monitored indicator is the cumulative amount of allocated support in EUR. This value is indicated on the map as the colour intensity of the respective districts. The colouring on the map is darker in the western part of the country. In the eastern half of the Slovak Republic, there is a relatively large number of non-coloured districts – meaning there is no registered support, while only the already-mentioned Košice-okolie district (KS) stands out in terms of colour intensity. Paradoxically, this indicates that higher regional aid expenditure was spent in a more developed area of the country, which contradicts the understanding of investment aid as a tool for balancing regional disparities. This disparity is also proven by the data: the highest cumulative amount of support in 2004–2021 was registered in the Žilina district (ZA), located in the north-western part of the country, where 302 million EUR was granted to support investments. This is followed by the Nitra (NR) district, located again on the west, where 16 projects were awarded more than 249 million EUR. In third place is the district of Košice-okolie, where 150 million EUR was granted to support 18 projects.
An interesting conclusion can be drawn from the MoE data if we take into consideration relative support per project in respective districts: although the eastern district of Košice-okolie is at the forefront in terms of the number of supported investment projects (first place) and the amount of allocated support (third place), the relative amount of support per project is low compared to western districts. It reaches only 8.3 million EUR, while support for one project in western districts such as Žilina reaches 25 million EUR. In Trnava, it reaches 23 million EUR and in Nitra 15 million EUR. Regarding the other districts in the east, or specifically the LDDs, relative aid is even lower: it averages around 4 million EUR per project during the monitored period. This data suggests that the state mainly supports smaller-scale and lower-added-value investment projects in these areas. This conclusion is also evident if the medians of eligible costs of projects in the least developed versus other districts are compared.1 While in lagging regions, the median of eligible costs reached the value of 4.6 million EUR, in other Slovak districts, this value was more than three times higher, specifically 15.9 million EUR.
To create a complete picture of the situation, we also include information regarding the remaining ranking of districts in relation to the amount of allocated aid in 2004–2021. The western district of Trnava (TT) is in fourth place, where only four projects were awarded 92 million EUR, followed by another district that is in the western part of the country, Galanta (GA), which is in fifth place, with the support of 79 million EUR.
As can be seen, almost all districts in the top five ranking of the highest cumulative amount of support are relatively economically developed and located in the western part of the country. The only less developed district in the top five ranking is the Košice-okolie district (KS).
4.3 Number of created jobs
The third monitored indicator is the number of jobs created in individual districts thanks to the implementation of supported projects. Although the data for new jobs is not shown on the map in Fig. 1, the MoE data suggests that it relatively corresponds to the data on allocated aid (the higher the support, the higher the number of created jobs). Again, the districts in the more developed areas of Slovakia dominate. The most jobs were created in the Nitra (NR) district (7,819), followed by the Žilina (ZA) district (5,190). On the contrary, third and fourth place are taken by the districts in the east – namely Košice-city (KE) with 4,486 and the Košice-okolie (KS) district with 3,703. Fifth place is given to Ilava (IL) district with 2,689 jobs, which is in the north west.
The examination of relative support per job leads to similar conclusions as the cases of relative support per project. The highest support per job is recorded in the western districts of Trnava (70,000 EUR per job), followed by Žilina (58,000 EUR), and Galanta (52,000 EUR). This finding is in line with an analysis conducted by the Institute of Economic and Social Studies (INESS 2017), which criticizes that the most expensive jobs were created in the regions that report “the lowest jobless rate in the long run, and firms are reporting a shortage of skilled labourers.”
5 Discussion
The results of this research have provided insights into how the regional aid scheme in Slovakia is applied in relation to the economic development of supported regions. We applied the method of spatial distribution analysis to the dataset of 233 supported projects during the period of 2004–2021. The study was designed to determine if there is a prevalence in any of the monitored aid indicators (the number of supported projects, total aid amount, and new jobs) in priority regions (the LDDs) in comparison with more developed areas of the country.
The results indicate that the support directed to Slovak priority regions is relatively rarer and lower than in the case of more developed areas in the western part of the country. One third of the projects were supported in less developed areas, representing only 16% of the amount of aid allocated nationally. The number of jobs created thanks to supported projects in left-behind districts accounted for 17% of national values.
If we look at this data through the lens of the share of the population living in LDDs, we can see that the population living in these areas accounts for approximately 21% of the total Slovak population and that this rate is relatively constant over the last 20 years (Statistical Office of the Slovak republic 2023a). However, if we look closely at migration patterns of the population living in the areas troubled with long-term high unemployment rates, we may find an interesting observation. Yearly data on population movement shows that the cumulative value of migration balance for all LDDs is negative for almost every year during the last 20 years. In 2001–2021, a negative migration balance was recorded 17 times in LDDs, with the average value of −589. For comparison, a cumulative migration balance for the rest of the country (all the districts that are not considered as the least developed) has been positive every year and ranges from 1,136 to 7,079 (Statistical Office of the Slovak republic 2023b). This implies that the emigration of the population from less developed regions might be associated with the lack of job opportunities in these areas. However, a deeper examination of migration patterns would help us establish a greater degree of accuracy on this matter.
Returning to the discussion on the investment support indicators – the results of our study revealed that there are several LDDs where no supported project is registered during the monitored period, while many others show only a minimal extent of aid. Surprisingly, perhaps the only positive exception is the district Košice-okolie. It ranked several times among the top five supported districts nationally – whether regarding the number of supported projects (first), allocated sum of aid (third), or number of created jobs (fourth). A possible explanation for this finding might be that the Košice-okolie district is characterized by several comparative advantages in contrast to other LDDs. Firstly, an advantage is its proximity to the second largest city and the unofficial capital of eastern Slovakia, Košice. This represents an interesting element for potential investors, especially in terms of available workforce. Although the city of Košice shows a relatively low unemployment rate, a significant pool of human capital is concentrated there, including graduates of local universities or vocational secondary schools, whose number and quality is not negligible. Such an abundant and quality candidate pool gives investors the opportunity to fill more qualified job positions and therefore realize more technologically advanced investment projects. These sophisticated projects require higher investments, resulting in a higher amount of eligible costs, which ultimately increases the maximum possible support (as it is calculated on a basis of eligible costs defined in the law of regional investment aid). Other important advantages of the Košice-okolie district are the elements of quality of life and standard of living. Investors consider these aspects especially important for relocated managers in a potentially new operation. Proximity to a big city means better social amenities, such as quality housing, education institutions, or medical care. The attractiveness of the Košice-okolie district is further enhanced by the international airport in the vicinity of Košice city as well as several industrial parks, offering potential investors greenfield plots with already good transport connections (road or railway infrastructure) and developed utility systems. Sometimes, greenfields in industrial parks already have documentation required for permitting processes (environmental impact assessments, zoning decisions, or even pro forma building permits), thus optimizing investment projects' implementation timelines. That the existence of industrial parks helps increase the attractiveness of the Košice-okolie district in the eyes of potential investors is also proven by the data. As examination of supported investments in 2004–2021 illustrates (MoE 2022), as many as 16 out of 18 supported projects in the district were implemented in the industrial parks (13 in Kechnec, one of the largest industrial zones in the region, and three in the industrial park Vel'ká Ida). Moreover, it is expected that the number of supported projects in the Košice-okolie district will significantly increase in the upcoming years because of a recent investment in a new 1.2 billion EUR plant that will produce electric vehicles by Volvo and because of the development of the carmaker's suppliers' network.
While it is true that an increased trend of aid provision in the east around the city of Košice can be observed, data shows that overall support for Slovak LDDs remains on a relatively low level. If we compare the trends in aid provision in regions based on their unemployment levels (above vs. below national average), we can see that although the support for developed regions tends to decline, left-behind locations fall short of registering increasing levels of aid. It is difficult to explain this observation; however, we believe that it might be related to the fact that these locations are in a type of regional development trap, a circular dynamic limiting their capacity to move forward. This finding is consistent with a recent study by Diemer et al. (2022), which shows that eastern Slovakia (where most less developed regions are located) has a higher risk of falling into a development trap than the rest of the country. In our opinion, these regions struggle to attract investments due to their economic and social problems, and no financial nor fiscal support offered by the state aid scheme serves as sufficient compensation. To be more specific, Slovak's LDDs strive to address the following issues:
- -Shortages in the labour force, as many people migrate to other regions or even abroad due to an absence of employment opportunities. Even if it could be expected that once an interesting job opportunity arises, part of the population may return, these regions would still struggle with a shortage of skilled labour and quality educational infrastructure (Kakaš – Gruber 2016).
- -An unfavourable level of accessibility to the transport infrastructure and the associated weak connection to customer–supplier chains (Michniak 2015).
- -A lack of locations for the physical implementation of the investment – an absence of industrial parks, ready-to-invest greenfields, industrial halls, and office spaces (MH Invest II 2022).
- -A worsening situation regarding the wage advantage that these regions have historically had, since cheaper locations further east emerged (Szent-Iványi 2017).
- -Insufficiency of local initiatives and know-how of the local administration regarding how to engage with potential investors and how to support them.
Before turning to the concluding remarks, we believe that it is worth addressing a common perception, which is that part of the provided investment support is indirect and therefore not included in the official statistics. This perception is not necessarily true; however, it may have occurred from the fact that there are certain situations where the state acts as a developer of transport infrastructure and utility networks. This is a specific case of so-called strategic parks, which are large-scale industrial parks (over 100 ha) intended for large projects, such as car manufacturers' factories. The Slovak government has legally established a mechanism for building such industrial parks (Law no. 371/2021 Coll. on significant investments), which was applied, for example, in the development of the industrial park for Jaguar Land Rover (JLR) in Nitra or, more recently, for the Volvo project in Valaliky in the Košice-okolie district. According to the legislation, the state does not develop an industrial park and its infrastructure and utility networks for the purposes of the investor but for all investors and affected entities in the area (including municipalities). Otherwise, the support would be considered selective and unlawful aid against the European state aid rules. In the case of automobile companies, it is assumed that their suppliers or other service providers (logistics, etc.) will also operate in the industrial park and that such technical infrastructure is intended to be used by all of them. Furthermore, the residents of the adjacent municipalities (cities and villages) might also benefit from the built engineering networks. Such support is not considered selective state aid but rather public investment to increase the attractiveness of a given location and facilitate the realization of private investments. However, according to the INESS (2017), such an approach is a “good illustration of the problem that complicates the evaluation of incentives” as “it is practically certain that without the arrival of the investor, these investments would not have taken place, and the company [car manufacturer] in particular will benefit from them.” INESS linked the critique to the case of the development of the strategic park in Nitra (JLR project), which was also the subject of a formal EC investigation as to whether JLR received additional non-notified state aid from the government. Nonetheless, following the investigation, the EC concluded that the conditions under which the strategic park was built did not constitute state aid and that the state did not give JLR any selective advantages (EC 2018).
This serves as an interesting case study related to the use of investment incentives; however, a valid question that arises in this context is whether the development of a strategic park by the state is adequate in the regions which are already fairly developed. For large automotive projects, the involvement of the state in such a way may be necessary, as the car manufacturers' factories require vast plots of lands (not only for the factory itself but also for adjacent suppliers), and in Slovakia, there are no such large, consolidated areas of lands intended and ready for industrial production. Only thanks to the law on significant investments can the government legally act as a developer and prepare the land in a reasonable time and manner required for such large-scale projects. The application of this approach might thus be considered a part of a competition policy used by countries when competing for these investments, which in turn have the potential to make a significant positive impact on regional economic development. However, according to the author's opinion, the economic and development characteristics of a location where such support is directed must be carefully considered. If such extensive public funds are allocated to the regions that are already front runners in terms of economic performance, this approach is counterproductive in achieving the reduction of regional disparities.
6 Conclusion
The findings of this study provided new insights into the application of regional state aid in Slovakia. The research aimed to examine the extent to which investment incentives support projects realized in the regions with high long-term levels of unemployment. Based on a spatial distribution analysis that focused on the LDDs, it can be concluded that the level of support in most of these areas is insufficient, and, in some cases, it is literally zero. This finding is alarming because it points to the fact that the districts that need regional development support the most are left out. Moreover, the number of districts officially considered the least developed has increased over time, even during the period when the national unemployment rate decreased. These observations suggest that regional disparities in Slovakia are not being adequately addressed.
Furthermore, we examined the trends in the application of regional state aid in Slovakia based on regional unemployment levels. The results indicate that although the level of support in developed parts of the country has a declining tendency, regions with a higher unemployment rate fall short of registering increasing levels of aid. The only district among those considered the least developed that positively stood out in our analysis was Košice-okolie, in which several projects have been supported over the past 18 years and a significantly higher amount of aid was recorded in this district than in other priority areas.
Although further investigations are needed (for instance, to determine the effectiveness of state aid or its effects on different socioeconomic indicators), the conclusions of this study may be helpful to policymakers addressing regional disparities in Slovakia. Since our analysis illustrates clear contrasts in the extent of regional aid directed to developed vs. lagging regions, finding a way to increase the levels of support and economic activity in the least developed regions remains an important challenge for the Slovak government.
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We decided to use the median rather than the average as a more appropriate indicator, since the compared data on eligible costs contain significant extreme values.
