Macroeconomic Drivers of Corporate Investment in the United Kingdom: A Multivariate Analysis

This study examines the macroeconomic drivers of corporate investment in the United Kingdom using a multivariate time-series framework. Focusing on five key variables-interest rates, inflation, GDP growth, exchange rates, and corporate profits-the analysis investigates their combined effects on aggregate corporate investment using annual data from 1990 to 2022. By concentrating on macroeconomic determinants rather than firm-level factors, the study provides evidence on how monetary and real-sector conditions shape investment behavior in a mature, market-based economy. The contribution of this study lies in integrating long-run macroeconomic trends within a multivariate econometric framework that captures interactions between corporate profits, inflation, and exchange-rate movements in the UK over three decades of evolving policy regimes. Given the mixed order of integration among the variables, the study employs an Autoregressive Distributed Lag (ARDL) bounds testing approach to examine long-run relationships and short-run adjustment dynamics. OLS and Two-Stage Least Squares (2SLS) estimates are retained as benchmark and robustness checks. The results indicate that higher interest rates exert a significant positive effect on corporate investment, consistent with the endogenous and pro-cyclical nature of UK monetary policy. Corporate profits have a strong positive influence, highlighting the importance of internal finance. Inflation exhibits a negative and significant impact, while GDP growth shows a weak accelerator effect and exchange-rate movements are statistically insignificant. These findings underscore the dominance of profitability and policy credibility in driving UK investment and offer relevant insights for sustaining long-term capital formation.