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Understanding the weakness in business investment: A cross-country analysis

Author

Listed:
  • Dennis Dlugosch
  • Ben Westmore
  • Max Glanville
  • John Hooley
  • Fatih Ozturk

Abstract

Weak investment has weighed on potential output growth in advanced and emerging economies since the global financial crisis (GFC), despite historically low cost of capital and strong corporate profitability. This paper documents shortfalls in business investment across OECD countries and examines their drivers, drawing from national accounts and firm-level data. Real business investment is around 23% below trend relative to the GFC on a weighted average basis. Subdued aggregate demand and elevated uncertainty appear to explain around half of this shortfall, with the remainder likely linked to more structural factors. Notably, the most pronounced changes in the composition of investment have occurred across asset classes rather than industries, reflecting the shift toward a more digital and knowledge-based economy, with increased investment in software and data, ICT hardware, and R&D. Changes in corporate behaviour also appear to have been important—including increased cash holdings and persistently high required rates of return on investment, despite lower capital costs. Taken together, these trends lend support to explanations for investment weakness related to financing challenges for intangibles, increased corporate caution, weakening competitive pressures, and declining business dynamism.

Suggested Citation

  • Dennis Dlugosch & Ben Westmore & Max Glanville & John Hooley & Fatih Ozturk, 2025. "Understanding the weakness in business investment: A cross-country analysis," OECD Economics Department Working Papers 1836, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:1836-en
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    More about this item

    Keywords

    balance sheets; cost of capital; digital transition; economic outlook; Investment; uncertainty;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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