We assess the effects of non-repayable subsidies on financially constrained and unconstrained Hungarian SMEs. Using rejected
subsidy applicants as control group and bank queries to the credit-registry to identify firms that applied for but did not receive a loan, we show that subsidies generate a sizeable incremental impact on asset growth of constrained firms relative to unconstrained businesses. This effect, however, is transitory and does not translate into higher sales, profitability or productivity.
Financing, therefore, may not be the primary hurdle for these SMEs, and credit constraints may reflect other shortcomings, such as lack of good management or viable projects.
JEL codes: G38, G21, E58.
Keywords: SMEs Subsidies, Credit Constraints, Emerging Market Economies, Difference-in-differences, Credit Registry microdata.