  Spatially targeted investment grant schemes are a common tool to support
firms in lagging regions. We exploit exogenous variations in Germany's main
regional policy instrument (GRW) arriving from institutional reforms to analyse
local employment effects of investment grants. Findings for reduced-form and IV
regressions point to a significant policy channel running from higher funding
rates to increased firm-level investments and newly created jobs. When we
contrast effects for regions with high but declining funding rates to those
with low but rising rates, we find that GRW reforms led to diminishing
employment increases. Especially small firms responded to changing funding
conditions.
