Research: Low interest rates and investment in productivity

Research summary

• Ongoing

Our research asks: how do firm financing strategies shape investment behaviour in a low interest rate environment?

We examine whether business investment behaviour drives or impedes productivity growth by considering large firms’ decisions to invest in either:

• enhancing their productive capacity (through investment in skills, equipment and processes)
• or expanding their production (generally by employing more workers, without improving productivity)

We look at how these strategies are balanced and how firm financing and the wider interest rate environment shape these investment decisions - conducting an original analysis of the relationship between extraordinary monetary policy measures and investment in productivity enhancement at firm level. In exploring this relationship, we find broader insights into the relationship between the credit environment, firm financing and investment strategies more generally.

These two forms of investment are not mutually exclusive - expansionary investments may include an enhancing component and some enhancing investments may also lead to increases in scale. We make the distinction to emphasise the core purpose and objectives of investment strategies in relation to how they are funded.

We sampled FTSE250 firms in two sectors (food and drink, and construction) for this mixed-methods study, focusing on how credit conditions between 2012 and 2016 encouraged firms to invest in either enhanced or expanded production.

News

• Research summary and policy discussion published by Common Wealth (April 2021). See Low interest rates and the productivity puzzle.

• Key findings of the research published by the Industrial Strategy Council (February 2021). See Low interest rates, investment strategies and the productivity puzzle | Industrial Strategy Council.