Abstract

In 1992, the Walloon Region modified its investment incentive legislation. The new legislation applies the notion of SME to any business employing up to 250 people and which turnover does not exceed 20 million ECU, and replaces the former interest subsidies and capital premiums by a grant calculated as a percentage of investment. According to the size of the business, the activity sector and the area, the maximum aid may vary from 13 to 21 %. The grant total percentage is calculated by summing up the percentage of aid obtained for five criteria under which job creation is by far the most important. The new legislation gives a partial answer to traditional criticisms against investment incentives. First of all it aims at reducing the risk of accelerated substitution of capital for Labour. Besides, it simplifies adminsitrative procedures and reduces the "sprinkling". It should also reduce the risk of inefficient allocation of resources thatarises when grants go to loss-making entreprises. But the question of whether investment incentives actually increase the level of investment remains largely unanswered. Evidence suggests that investment incentives might have contributed to attract foreign investments hut have little impact on thelevel of domestic investment. Nevertheless, as far as SMEs are concerned, public grants might contribute to increased investment not by reducing the cost or increasing the profitability of the project but rather by increasing the means available in the business.