The British economy has long suffered from a chronic lack of investment. Many factors explain the lack of sufficient investment. One recurring theme is short-term thinking by managers who don't invest in projects with long-term rewards. and by governments that do not provide a stable policy environment.
Investment is at the root of economic growth and prosperity. When an economy directs funds to capital, it creates the building blocks for higher levels of productivity in the future. Investment also fosters the further spread of ideas and innovations that support technological progress and wage growth.
The UK economy has suffered from chronic underinvestment compared to countries such as France and Germany, which have achieved significant improvements in living standards over the past 25 years.
British investment is low
Investment rates across the UK have fallen from a high of around 23% of GDP in the late 1980s to around 17% since 2000. That means it's down to just three-quarters of its previous share. On the other hand, as Figure 1 shows, investment rates in typical G7 countries largely remain in the 20-25% range.
Figure 1: Investment as a share of GDP
Source: Chadha and Samiri, 2022
This decline was mainly due to lower investment in equipment and machinery, including information and communication technology (ICT) equipment. This has fallen from around 8% of GDP in 1987–97 to less than 4% since 2009, making it the lowest share in the G7 (Alyande and Coyle, 2023). Much of it is made up of business investment, the total of which has fallen from about 12% of GDP to 9% over 30 years.
A significant proportion of investment is now in “intangible assets” that are difficult to measure, such as knowledge, patents, brand value, and goodwill that a company has created or acquired. Intellectual property accounts for the bulk of this, with investment remaining fairly constant at around 4% of GDP, with its share of total investment increasing slightly.
In the 1980s, the UK's share was above the average for G7 countries, but now it lags far behind France, Japan and the US.
In the long term, the main drivers of productivity will be technological progress and innovation, embodied in new investments and facilitated by investment in research and development (R&D).
Most new technologies adopted in one country, such as the UK, were developed in other countries. However, an active domestic R&D program is important, both to create the technology that British companies need to be internationally competitive, and to encourage the absorption and adoption of technology developed in other countries. .
Over the past 30 years, the share of research and development spending in the UK has fallen, falling below 2% of GDP. Research and development data is subject to revision, but suggests that UK spending is relatively low compared to other G7 countries. For example, Japan spends 3.5% of its income on research and development, while Germany and the United States spend about 2.8%.
Low investment is also reflected in other economic variables. The share of consumption in the UK's GDP has been steadily increasing (from 1970 he increased by 8 percentage points between 2023 and 2023). This has been done at the cost of investment falling by 6 percentage points of GDP, which is financed by net trade (and thus net foreign borrowing and lending) that moves from a small surplus to a deficit of about 2 percentage points of GDP. ) (see Figure 2). .
Figure 2: Consumption, net trade, and investment as a share of GDP: percentage point deviation from the average, 1970–2023
Source: Chadha and Samiri, 2022
public sector investment
UK public investment has fallen from an average of 4.5% of GDP between 1949 and 1978 to 1.5% between 1979 and 2019. A significant part of this decline can be explained by the Thatcher government's privatization program in the 1980s. Subsequent disappointing investment performance by utilities and transportation networks has raised questions about its regulation.
Public investment in economic activity that remains in the UK public sector is low and suffers from short-termism and stop-start practices. Particularly since 2010, attempts to rein in public debt through the establishment of the Office for Budget Responsibility (OBR) may have created incentives to reduce public investment in successive fiscal events.
The OBR's mandate focuses on short-term production and debt forecasting, and does not allow such investments to penetrate into the supply side of the economy, thereby boosting incomes, the denominator of debt-to-debt. . GDP Equation (Chadha, 2023).
The UK experience compares unfavorably with other countries, as project management is exposed to new political or financial hurdles that create uncertainty and delays. This ultimately impacts both the cost-effectiveness of investments and the private sector's willingness to invest in complementary assets.
private investment
Private investment decisions depend on the balance between the cost of implementing the project, the expected future returns to the investor, the investor's objectives and the decision-making process.
project cost
Is it more difficult or more expensive to work on an investment project in the UK than similar projects in other countries?
The evidence here is fragmentary and covers many aspects of barriers and costs to new investment projects. Land is expensive (in some locations) and planning procedures are often slower and more burdensome than in other locations. There are wide variations in the efficiency of the construction sector and a lack of domestic capacity to carry out large-scale projects, reducing competitive pressures and increasing construction prices.
Some evidence suggests that the combination of land and building regulations and construction costs result in significantly higher project costs in the UK than in other countries.
Upgrading equipment such as ICT services may also have relatively high costs. Studies on the adoption of new digital technologies often point to a lack of skilled labor to install and operate new tools as a barrier to investment.
Capital projects require funding, and there has been extensive research into the difficulties businesses face in raising the necessary funds. The UK venture capital market is deeper than other European countries, but geographically concentrated in the south-east of England. It's also much thinner than the US one.
On the other hand, it has been frequently argued over the years that companies, especially small and medium-sized enterprises, have difficulty raising funds for long-term investments. Intangible investments, including research and development, are particularly difficult to finance due to the lack of collateral by tangible assets.
expected return
Investment projects benefit businesses by creating efficiencies that enable them to make the most of market opportunities and reduce subsequent operating costs.
Market opportunities arise when domestic demand for the products and services offered by a company is expected to increase, or when investments provide a basis for supplying export markets or participating in global value chains. This is particularly important for multinational companies involved in foreign direct investment (FDI) that supply many markets and have a wide range of operations.
These incentives have been undermined by the events of the past 15 years. Austerity (reductions in public spending to reduce government deficits and debt), both in its post-GFC and current form, leads to expected lower growth in domestic spending, which in turn suppresses investment.
Brexit has increased export costs and increased levels of uncertainty. It is particularly having a negative impact on the functioning of supply chains across Europe. Much of the UK's past inward direct investment has been described as an 'export platform'. For example, Japanese companies have used the UK as a supply base for the European single market, but that incentive is now much less valuable.
While these two factors may be holding back investment, timing suggests they are not the complete explanation. What other underlying factors might be at play? Rather than a single predominant cause, there are multiple suspects at play.
The competitive environment in which a company operates is important. When a company faces too little competition, the most profitable strategy may be to limit production and raise prices, rather than cutting costs or improving quality to expand market share. There is a possibility that
What about investments that are primarily aimed at reducing operating costs rather than increasing production capacity? There are two sides to this question. One is that some costs are already low in the UK, so cutting costs further will have little effect. If low-skilled labor in the UK is cheap (and flexible), why bother investing in equipment that can potentially replace it?
Another aspect is that some elements of costs are high in the UK and are outside of a company's control even if they invest. This is especially true for complementary public investments. Poor transport infrastructure, high regulatory burdens, high energy costs, high housing and rental costs, and high costs of skilled labor make the UK a less attractive location for international mobile investment. It may also reduce your return on investment more broadly.
Uncertainty, short-termism, and business behavior
Uncertainty hinders investment. Uncertainty delays plans, and additional risks raise the bar for the rate of return needed to start a project. There is a high level of uncertainty surrounding government policy, from fiscal issues (including corporate tax) to sector-specific strategies, broader regulation, and even ministerial terms.
Research on industrial policy uncertainty in the UK points to a lack of coordination between different departments of government and other stakeholders, as well as a severe lack of coherence (Coyle and Muhtar, 2023). Industrial strategies and regulatory measures change frequently, creating uncertainty and preventing governments from learning from experience over time.
Tax treatment is also part of this. Can capital investment be offset against future returns? The UK government has gone through many changes. Although the current UK system is relatively lenient, it has been changed at least 18 times and possibly as many as 24 times since 1984. This complicates long-term planning for the private sector.
Finally, there is the issue of the qualifications and motivation of managers. Although this varies widely from company to company, there is evidence that the quality of management teams in the UK is low by international standards. In small companies, managers can be overwhelmed with day-to-day business operations or distracted by ensuring the survival of the company.
Both factors create short-termism. Lack of long-term strategic thinking required for investing. If it is indeed done, it may be based on criteria biased toward short-term projects (e.g., payoff period criteria rather than full value over the life of the project).
Because large companies often have short terms of top management, they may have their own bias toward short-termism, and financial markets tend to be driven by short-term business performance aimed at maximizing stock prices. It is possible to apply pressure. In both the UK and the US, the role of private equity is often seen as a pernicious aspect of 'financialisation', as it forces companies to take on debt to cover short-term payments.
Therefore, investment should be given high priority in public spending and policy design, and not subject to the whims that we have repeatedly seen in the UK, thus hoping to pull the UK out of the low investment trap. Now. This country needs its leaders to set long-term goals and find the political will to follow through.
Where can I find more information?
Who is the expert on this question?
- Tony Venables
- Jagjit Chadha
- Diane Coyle
- Chris Pissarides
