Finnish telecoms giant Nokia has angered the German federal state of North Rhine-Westphalia (NRW) by announcing its plans to close a cell-phone manufacturing plant in Bochum, Germany. At the center of the dispute is over €40 million worth of investment subsidies that NRW gave Nokia in order to attract the company. Government officials in NRW have asked that Nokia return the subsides, saying that the company did not live up to its commitments under the subsidy agreement.

On 15 January, Nokia announced that it was shutting down the Bochum plant, with production to be transferred to the so-called Nokia Village in Romania, where wages are lower. German workers at the Bochum plant are paid approximately €29 an hour compared with the €7 an hour their Romanian counterparts receive.

Shortly after Nokia's announcement, NRW officials announced that they would investigate whether Nokia had taken undue advantage of German or EU subsidies, according to France Agence Press. A few days later, Financial Times Deutschland reported that the state had not found evidence that Nokia had received more subsidies than it was entitled to.

However, NRW still alleges that Nokia has not lived up to its employment commitments. NRW gave Nokia €40 million in subsidies in 1998/99, as the company converted a television plant to produce cell phones. The agreement originally called for Nokia to create 3,459 full-time jobs for which social security was to be paid. When the company failed to meet that target the Social Democrat-led state government lowered the target to 2,860.

According to NRW, the company has hired 350 workers fewer than the target, prompting its request for a return of the subsidies.

In a press release, Nokia said it was "astonished" by NRW's claims. The company maintains that it invested over €350 million and created an average of 3,200 jobs during the time it has operated the plant in Bochum. Nokia says it has submitted documents to the state in which it detailed "all relevant facts including information on types and number of jobs created," and had received no complaints in response.

The dispute between Nokia and NRW has raised questions on the use of subsidies by local governments to lure or keep businesses in their jurisdictions. Politicians generally defend the policy on the grounds that it increases local employment, as well as the tax base for the local government.

As University of St. Missouri-St. Louis investment-subsidy expert Dr. Kenneth Thomas explains, critics of investment subsidies argue that they "lead to inefficient allocations of capital and that they are windfalls for the company receiving them, paid for by average taxpayers; hence, they exacerbate inequality."

"The demand for repayment of subsidies highlights a common problem: companies often do not provide all the jobs they promise when they get subsidies from government, and governments very often do not monitor compliance closely," adds Dr. Thomas.

Moreover, when the economics on their own do not make an investment viable, subsidies have to be continuously granted, or these investments can be short-lived.

The Nokia-NRW dispute has also raised questions about EU infrastructure assistance to new members such as Romania. Some German politicians have blamed the EU for the Nokia move, pointing to EU subsidies which helped construct part of the industrial park to which Nokia is shifting production.