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

Sudipto Karmakar, Marko Melolinna () and Philip Schnattinger
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Marko Melolinna: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 992, Bank of England working papers from 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.

Keywords: Dynamic programming; firm-level productivity; intangible assets; panel regression (search for similar items in EconPapers)
JEL-codes: C61 D22 D24 O30 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2022-07-15
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-eff, nep-eur, nep-fdg, nep-sbm and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0992

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