Presenatation from ERC to the TPI Productivity Conference . December 2023

1. Firm-level decisions on productivity-
enhancing investments
Rapid literature review
11/12/2023
E. Golubova, Prof. S. Roper, Prof. J. Du
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2. Introduction
 In the context of UK’s longstanding “productivity puzzle” and “missing investments puzzle”,
as well as recognised links of firm-level investments to productivity; and
 As part of the Productivity Institute’s (TPI) Business Innovation programme, ERC-TPI project
is set to examine firm-level productivity-enhancing investment decisions
 We aim to (1) enrich the evidence base on productive investments, and potentially to shape
future TPI research agendas; (2) develop practical strategies which UK firms can adopt to
maximise the productivity value of their investments.
 This works comes in the following stages:
 Rapid literature review to inform survey and qualitative data collection
 Large-scale representative business survey with UK firms
 In-depth qualitative data collection
 Both tangible and intangible investments considered
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3. Process
 Sources: Web of Science (Clarivate) and Scopus (Elsevier) for academic literature,
numerous grey literature sources (e.g., Bank of England, TPI, ERC, IFS, IfG, OECD, IMF,
World Bank, CEP)
 Broad selection criteria:
 Evidence published in the last 10 years in English
 Inclusive of any country, methodology, investment type and firm type
 Key search terms are combinations and variations of terms on investment, productivity,
firms, decisions (incl. behaviour, strategy, choice) and, for some searches, investment
goal to be comprehensive (e.g., “investment to improve”)
 For academic literature, we screened titles/abstracts of 1,316 papers, selected 122
for full paper screening and included 70 papers the analysis
 For grey literature, their publication/research databases were screened, 85 papers
from 13 sources were selected for full-screening, 25 were included in the analysis
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4. Findings 1: Search results
 Less than 15% of papers study investments in relation to productivity
directly. About 20% study how firms make investment decisions generally
speaking
 Most papers focus on investments of specific type that impact firm
productivity: e.g., R&D or innovation, ICT, human capital
 Notably, much of the literature (c. 40% in the analysis stage) studies firms’
decisions to invest in energy efficiency
 Quantitative methods dominate: about 10% of analysed documents used
primarily qualitative methods.
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5. Findings 2: Firm characteristics
 Literature reiterates the known links between firm characteristics and performance also
with regard to firms’ probability of making investments (any type), mainly larger size and
exporter status
 Lai et al., 2015, Zhang & Islam, 2020, Carboni & Medda, 2018, Peters et al., 2022, Carboni & Medda,
2021, Fernandez de Guevara et al., 2021, Batalla-Busquets & Myrthianos, 2015, Bosman et al., 2020,
Knuutila & Vuorio, 2023, Ozbugday et al., 2022; Lai et al., 2015, Manez et al., 2015, Peters et al., 2022,
Hrovatin et al., 2016; Bomprezzi et al 2022; European Investment Bank, 2019
 Few other noted characteristics are foreign ownership (for staff training & energy
efficiency investments), family ownership, and public listing (for R&D)
 Batalla-Busquets & Myrthianos; 2015, Hrovatin et al., 2016; Kostka et al., 2013; BEIS 2022
 Studies provide evidence of heterogenous effects of firm characteristics on productive
investment based on the above and:
 Sector, incl. low/high technology or knowledge sectors (Shubin Yang et al., 2020,
Garcia-Quevedo et al., 2017, Jeffers, 2023);
 Urban/rural split (Andersson et al., 2023)
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6. Findings 3: Financial and other resources
 There is a link between a firm’s financial resources and its investing. This includes
cashflow, credit rating, leverage, indebtedness (incl. long term debt), operating profit,
current tangible and intangible assets, as well as access to finance.
 Lai et al., 2015, Peters et al., 2017, Evemy et al., 2023, Fernandez de Guevara et al., 2021, Fernandez de
Guevara et al., 2021, Sakai, 2020, Bosman et al., 2020, Hernan Zeolla & Santarcangelo, 2023, Moreno-
Mondejar & Cuerva, 2020; Zhang & Islam, 2020, Andersson et al., 2023, Marques et al., 2019; Bank of
England 2022; Bank of England, 25 June 2021; TPI 2023; Carella et al. 2023; Melollina et al, 2018
 Few studies differentiate between finance types. E.g., external funds are more often
used for financial than productive investments, internal finances for technology
investments, credit finance to fund capital investing (Long et al., 2020, Shubin Yang et al., 2020)
 Human resources, incl. better management and higher financial literacy, increase
investing due to greater knowledge and expertise within the firm,
 Lai et al., 2015, Zhang & Islam, 2020, Batalla-Busquets & Myrthianos, 2015, Moreno-Mondejar & Cuerva,
2020, Brandily et al. 2023, Roland 2020, TPI 2023
 Plus, few studies focus on specific human resource issues such as labour mobility (Jeffers,
2023), labour unions (Shin & Hwang, 2021), or a share of fixed-term jobs (Forgione &
Migliardo, 2019) 6

7. Findings 4: Perceptions and attitudes
 Literature postulates that firms invest based on return on the investment, mostly
understood as profitability (e.g., expectations of future demand or sales from innovative
product), with firms prioritising quicker returns over longer returns
 Carboni & Medda, 2021, Ikonnikova et al., 2022, Hrovatin et al., 2016, Klemick et al., 2019, Nehler &
Rasmussen, 2016, Peters et al., 2017; Feulefack & Sergi, 2015; Baddeley, 2023, Globisch & Dütschke, 2020;
Nabarro 2022; Bank of England, 2021; Carella et al. 2023; Klemick et al., 2019
 Expected returns are studied in terms of uncertainty for firms, which typically prevents
investing, especially in intangibles
 Jones et al., 2021, Cagno et al., 2014, Knuutila & Vuorio, 2023, Venmans, 2014, Garcia-Quevedo et al., 2017
 There are also indirect benefits of firm investment, such as future learnings or productivity
increase, though studies tend to focus on firms failing to consider these benefits, often due
to the lack of information / knowledge and associated costs to obtain such information, esp.
for energy efficiency and novel less-known technologies
 Cooremans & Schonenberger, 2019; Kalantzis & Niczyporuk 2022; Nehler & Rasmussen, 2016; Rasmussen,
2020; Ikonnikova et al., 2022; Nehler et al., 2014; Vecciolini 2019
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8. Findings 5: Stakeholders
 Few studies focus on how firm leaders’ incentives, personal attitudes and experience affect
their decision to invest (e.g., climate sceptics are less likely to invest in energy efficiency,
experienced leaders identify opportunities for investment)
 Koryak et al., 2015; Hsiao et al., 2019; Knuutila & Vuorio, 2023; Jones et al., 2021
 Some studies focus on a positive impact of different stakeholders, internal or external, on
firms’ investment decisions, though these vary:
 Support from the top management, energy/sustainability or facilities management teams, external energy
efficiency consultants -> energy efficiency investment (Cooremans & Schonenberger, 2019; Hoppmann et
al., 2018; Globisch & Dütschke, 2020)
 Cooperating with other firms in R&D -> R&D investment (Aboal & Garda, 2016)
 Collaboration with universities, research centres, suppliers and clients -> human capital (Batalla-Busquets
& Myrthianos, 2015)
 Director board diversity (in time of economic crisis) -> all investments (Sun et al., 2015)
 Internal or external “champions” -> productive investment (Jones et al., 2021)
 Effective IT decision making structure (IT and top managers) -> IT investment (Turedi & Zhu, 2019
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9. Findings 6: Public sector and policy
 One of the most common factors in investment decisions is public policy, such financial
support for R&D, public investment and environmental regulations or levers
 Aboal & Garda, 2016; Hud & Hussinger, 2015; Li et al., 2022; Cagno et al., 2014; Garcia-Quevedo & Jove-
Llopis, 2021; Kostka et al., 2013; Zhou et al., 2023; Brusco & Glass, 2023; Evemy et al., 2023; Jacob,
2021; Shengyi Yang, 2023; Dorsey-Palmateer & Niu, 2020; Gong et al., 2019; Abdullah et al., 2017, Peng
et al., 2022; van Ark et al. 2023; TPI 2023; Stern et al 2020; IFG 2022; Wilkes 2022; Zhu & Chertow, 2017;
Pan et al., 2019; Carella et al 2023
 Esp. for capital investments, studies find influences on productive investment from fiscal
policy (esp. tax policy) and monetary policy (esp. via interest rates). Though they do not
seem to affect intangible investments as much
 Brusco & Glass, 2023; Jacob, 2021; Bank of England 2021; Adam et al. 2022; Hanappi et al. 2023 Carella
et al. 2023; Evemy et al., 2023; Brito et al. 2018; Dottling and Ratnovski 2020
 Very few studies examine how business support impacts productive investment (Jibril et
al. 2021; Roper et al. 2020)
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10. Findings 7: Other external factors
 Studies identify a number of other external factors, often macro-economic, that affect
firm’s productive investment decisions. These are:
 Energy prices, usage or energy crises (Tang, 2020; Uz, 2018; Cooremans & Schonenberger,
2019; Hrovatin et al., 2016)
 EU-exit (Bank of England, 2021; Carella et al 2023; Gornicka 2018)
 Stock prices or their volatility (Alaali, 2020; Xiao, 2020)
 Market demand (TPI 2023, IFG 2022)
 Real estate prices (Fougere et al., 2019)
 Marginal cost of capital (Dinh et al., 2013)
 Economic financialisation (Zheng et al., 2019)
 Higher competition (Xin & Choudhary, 2019)
 COVID-19 pandemic (Bank of England 2021)
 A common theme about these factors is that the level of uncertainty discourages firms
from investing
 Melollina 2017; Smietanka et al., 2018; Bank of England, 2021, Chu & Fang, 2021
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11. Findings 8: Investment interactions
 Firms consider different investments in their decision-making. A decision to invest
coexists with considerations of other investment options, opportunity costs, investment
feasibility and future investment objectives
 Ikonnikova et al., 2022, Klemick et al., 2019, Sakai 2020; Teresa Costa-Campi et al., 2019
 Previous investments and decisions, e.g., regarding R&D, innovation, exporting and
energy efficiency, influence decisions to invest
 Manez et al., 2015, Zhang & Islam, 2020, Knuutila & Vuorio, 2023, Carboni & Medda, 2021,
Teresa Costa-Campi et al., 2019
 Investment interaction might also result in crowding out effects. E.g., green investment
has been found to crowd out some types of other investments incl. productive
investment.
 Shengyi Yang, 2023; Hrovatin et al., 2016; Weche, 2019
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12. Summary  Implications
1. There is a heterogeneity of firm characteristics, contexts, markets and organisational structures,which may
have implications for how investment decisions are made.
 Capture the heterogeneity in research through a large business survey and diversification in qualitative
research.
2. Investment decisions are contextual in nature: external stimuli, type of investment, financial constraints,
investment objectives and history are of influence by themselves and in combination.
 Consider firms’ investment decisions in the light of both market and broader economic contexts, but also
in the light of the trajectory of the firm itself.
3. There are potential combinations of tangible and intangible investments with some factors having
differential effects on these types.
 Differentiate between investment types and their drivers; examine how firms combine tangible and
intangible investment decisions.
4. Few studies focus directly on who makes investment decisions in firms and what influences these decisions.
Establish the identity of key decision makers or networks of key stakeholders and how they contribute to
making investment decisions.
5. Relatively little literature suggests that productivity improvement is the primary goal of firms’ investment.
 Approach the topic of ‘productivity enhancing investment’ with firms cautiously; carefully test and
evaluate data collection tools. 12