The second half of the 1980s witnessed a major and widespread recovery in business investment expenditures in the OECD countries. Real gross fixed investment by the business sector grew by only 3.8 per cent per year from 1970 to 1979 and stagnated during the recessionary period of 1980 to 1983. In the five years 1984 to 1988 it then grew by almost 7 per cent a year. Nevertheless, the increase in the stock of productive capital - gross investment less scrapped capital - as a proportion of output tailed off in the 1980s in most OECD countries.
These events raise several related questions: what accounts for the recent strength in investment? Can it be expected to continue? Is the deceleration of capital-output ratios a cause for concern? If so, should governments attempt to raise investment? This paper attempts to provide answers, sometimes tentative, to some of these questions. The neo-classical model of investment is used as a framework of analysis, and emphasis is placed on the supply-side aspects of capital formation rather than its business-cycle, or demand-side aspects. The focus is therefore on aggregate business-sector fixed investment, as the bulk of productive capital in OECD economies is in the business sector, and other categories of investment - residential construction, stockbuilding and public sector investment - are not driven by the same economic factors.
Section I assesses the evolution of investment and capital formation in OECD countries over the past two decades. The determinants of investment demand' are analysed in Section II. Section 111 reviews investment policies and their economic effects, concentrating on the U.S. experience with investment incentives during the 1980s. Section IV considers some economic consequences of investment. The final section presents the conclusions.
CONTENTS
Introduction
I . The evolution of business fixed investment
II . The determinants of investment
- A . A summary of the "neo-classical" theory of investment demand
B . Empirical evidence
C . "Non-neoclassical" explanations
D . Conclusions on investment demand
Ill . Public policy and investment
- A . Econometric studies
B . Applied general equilibrium (AGE) models
IV . The benefits of investment
- A . Capital formation
B . Embodiment effects
V . Conclusions
Annex: Statistical tests on output. capital. the cost of capital and profits
Bibliography
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