In a world of increasingly mobile capital, labor and production, governments are hard pressed to attract new firms to their jurisdictions or to maintain their existing firms. Competition to attract investment frequently leads governments to provide incentives such as tax breaks and subsidies to businesses. Governments face similar pressures for granting subsidies but choose different methods when doing so. While Austria and the Netherlands provide subsidies for research and development, Portugal, France and Ireland focus on specific sectors, and Belgium and Italy stress regional assistance. Why do we see such variation in the amounts, objectives and methods of government support to business? This paper develops a model to account for the impact of political institutions on the level and objectives of state support to businesses, and tests this model with data from the European Union (EU) member states. Conventional wisdom on globalization, known as the "efficiency thesis," suggests that as trade and capital movements liberalize, the capacity and effectiveness of government intervention in the economy will decline and policies will converge on a neoliberal bottom (Andrews 1994, Cerny 1995). In contrast, much of the empirical research shows that national policies have proved resilient to the pressures of globalization, and that government spending has increased in response to the insecurity and inequalities associated with economic openness (Cameron 1978, Rodrik 1998, Ruggie 1982, Pierson 1994, Hall and Soskice 2001). This project contributes to this debate by exploring how government policies to support industry are influenced by domestic political institutions on the one hand and capital mobility on the other. It draws on a growing literature in political economy that explores how electoral institutions such as electoral formulas, district sizes, and political competition influence economic policies. I propose that in countries with majoritarian electoral systems, small district sizes and low ideological polarization, subsidies will tend to be more particularistic, such as subsidies to specific sectors in decline, due to the need for appealing to narrow constituencies. In contrast, PR systems, large electoral districts and high ideological polarization will lead politicians to choose broader programs to help businesses, such as R&D and employment subsidies. This paper uses data on state aid to industry collected by the Commission of the European Union to test these hypotheses. Works CitedAndrews, D.M. (1994) ?Capital Mobility and State Autonomy?, International Studies Quarterly 38(2): 193-218.Cerny, P.G. (1995) ?Globalization and the Changing Logic of Collective Action?, International Organization 49 (4): 595-625. Cameron, D. R. (1978) ?The Expansion of the Public Economy?, American Political Science Review 72 (4): 1243-1261.Hall, P.A. and D. Soskice. (2001) ?An Introduction to Varieties of Capitalism,? in P.A. Hall andD. Soskice, Varieties of Capitalism. New York: Oxford University Press. Pierson, P. (1994) Dismantling the Welfare State? : Reagan, Thatcher, and the Politics of Retrenchment. New York: Cambridge University Press. Rodrik, D. (1998) ?Why do more open economies have bigger governments?? Journal ofPolitical Economy 106:5, 997-1031.Ruggie, J.G. (1982) ?International Regimes, transactions and change: embedded liberalism in the postwar economic order?, International Organization 36 (2): 195-231. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]