Investment in OECD Countries: a Primer

Abstract

Aggregate business investment is a major driver of long-term economic growth. It has been weak in many advanced economies over the last decade, partly due to cyclical demand-side effects. Nevertheless, a number of structural factors and policies interact with and have an effect on business investment. This paper provides a survey of the literature on the main policy drivers of business investment such as finance (including bank and market finance, venture capital and the debt bias in corporate taxation), tax policies, foreign direct investment, product and labour market and environmental regulations, the importance of an efficient insolvency regime, the negative impact of (regulatory) uncertainty and the role of infrastructure investment as a support for business investment.

How does corporate taxation affect business investment?

“…49 Since the mid-1990s, changes in investment rates by business industries are strongly correlated with changes in investment rates for tangible assets in those industries, while there is no correlation with the changes in intangible investment rates ( Business investment is also low given the actual level of businesses' profits and assets (measured by the net stock of fixed assets in the previous year). 51 In particular, for the median OECD country, the investment ratios after the GFC are usually all below the lowest pre-GFC point (Figure A B.4). 49 The increasing importance of intangibles could also explain an investment slowdown if intangible assets support increasing market power, for example because intangible assets are non-rival and favour economies of scale.…”

“…While not being the focus of this paper, the latter effect could be macroeconomically relevant. Recent literature has suggested that the misallocation of the factors of production has contributed to half of the fall in total factor productivity in the United States and Europe in recent years (Baqaee and Farhi, 2019 [50]; ECB, 2021 [51]).…”

“…50 Increasing investment in intangibles for a given sector also implies an increase in the value-added of the sector. 51 In theory, various structural factors could explain a divergence between business value-added, profits and capital stock such as trends in depreciation or market power. Fahri and Gourio (2018 [26]) provide a relatively simple neo-classical model illustrating potential determinants of the different investment ratios.…”