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What is productive investment? Insights from firm-level data for the United Kingdom

Author

Listed:
  • Sudipto Karmakar

    (Bank of England)

  • Marko Melolinna

    (Bank of England)

  • Philip Schnattinger

    (Bank of England)

Abstract

This paper studies the effects of different types of investment and levels of debt on productivity in the UK, using firm-level data. We set out a stylised model of a dynamic firm profit-maximisation problem, and augment this model with an external financing option in a novel way. We use the model to illustrate why productivity-enhancing investment differs from other uses of company funds in terms of its effects on total factor productivity (TFP), and how these positive effects can be stronger for firms that have higher indebtedness. We then examine the issue empirically with data on listed firms in the UK. Our main finding is that intangibles investment are a good proxy for productivity-enhancing investment, as they have a positive effect on TFP, and in those firms that have high debt and high levels of intangibles, these effects are even more pronounced. On the other hand, we find no consistent evidence of positive TFP effects for other uses of funds, like tangible capital expenditure or dividends and equity buybacks. The effects of debt on TFP are smaller and more tenuous, but we find no evidence of a negative TFP effect of debt in firms that have high levels of intangibles intensity.

Suggested Citation

  • Sudipto Karmakar & Marko Melolinna & Philip Schnattinger, 2022. "What is productive investment? Insights from firm-level data for the United Kingdom," Bank of England working papers 992, Bank of England.
    • Handle: RePEc:boe:boeewp:0992
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    References listed on IDEAS

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    Cited by:

    1. Kox, Henk L.M., 2022. "A micro-macro model of foreign direct investment: knowledge-based gravity forces, self-selection and third-country effects," MPRA Paper 115542, University Library of Munich, Germany.

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    Keywords

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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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