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

42 Pages Posted: 19 Jul 2017

See all articles by Robin Döttling

Robin Döttling

Erasmus University, Rotterdam School of Management

German Gutierrez Gallardo

New York University (NYU) - Leonard N. Stern School of Business, Students

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: July 2017

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.

Suggested Citation

Döttling, Robin and Gutierrez Gallardo, German and Philippon, Thomas, Is There an Investment Gap in Advanced Economies? If So, Why? (July 2017). Available at SSRN: https://ssrn.com/abstract=3002796 or http://dx.doi.org/10.2139/ssrn.3002796

Robin Döttling

Erasmus University, Rotterdam School of Management ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

German Gutierrez Gallardo

New York University (NYU) - Leonard N. Stern School of Business, Students ( email )

NY
United States

Thomas Philippon (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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