Investment in Greek manufacturing under irreversibility and uncertainty: the message in used capital expenditures

Abstract

This article contributes to the existing literature by showing that uncertainty produces a nonuniform impact to the extent that different types of capital goods exhibit heterogeneous irreversibility, which we define as asset-specific irreversibility. Hence, asset-specific irreversibility is responsible for asymmetries in responses across types of capital goods to uncertainty. We also show that for a given type of capital good, uncertainty produces a variety of responses across sectors, which we define sector-specific irreversibility. In other words, sectoral differences in terms of the ability to substitute a given type of capital with labour, introduce a second-order effect of uncertainty on investment.

Investment–uncertainty relationship: differences between intangible and physical capital

“…Therefore, the significant estimates we found for Bloom's model determinants support the existence of flow adjustment costs for intangibles, while the partial failure to identify valid empirical representations for tangibles suggest that, as assumed in the theoretical framework, they are subject to stock adjustment costs. Therefore, our estimation results for investment in physical capital support the empirical specification of Bloom et al (2007) and of Drakos and Goulas (2010), whereby uncertainty only comes into the equation through its interaction with demand and/or directly.…”

“…Drakos (2011) analyses buildings, machinery and equipment, and motors and vehicles for plant-level manufacturing data drawn from the Annual Industrial Survey for Greece (6,119 plants recorded over the 1993-2005 period); uncertainty has a negative effect on the extensive margin, decreasing the likelihood of triggering the investment in new capital. The analysis is taken one step further by Drakos and Goulas (2010) who analyze asset-specific and industry-specific irreversibility (measured in terms of the ratio of the average percentage of used capital to the sum of new and used capital expenditures). They show that uncertainty exerts a negative effect on total investment, as well as on investment in buildings, machinery and vehicles, while it exerts a positive effect on fixtures and fittings, in line with its lower degree of irreversibility.…”

What is the investment loss due to uncertainty?

“…Greek manufacturing under irreversibility and uncertainty: the message in used capital expenditures Drakos and Goulas (2010) An unbalanced panel of 22…”