Is There an Investment Gap in Advanced Economies? If So, Why?

Abstract

We analyze private fixed investment across European economies and in the US over the past 20 years. We study the impact of competition and financial constraints on tangible and intangible investment. We find that investment is weak in both regions, but argue that the reasons are cyclical in Europe and structural in the US. In the US, we find that investment is lower than predicted by fundamentals starting around 2000, and that the gap is driven by industries where competition has decreased over time. The decline in US investment has coincided with increased concentration and decreased anti-trust enforcement. In Europe, we find that investment is roughly in line with measures of profitability and Tobin’s 𝑄 for the majority of countries, except at the peak of the crisis. Unlike in the US, concentration has been stable or declining in Europe, while product market regulations have decreased and anti-trust regulation has increased. Regarding intangible investment, we find that it accounts for some but not all of the weakness in measured investment. We also find that EU firms have been catching up with their US counterparts in intangible capital. The process of intangible deepening happens mostly within firms in Europe, as opposed to between firms in the US.