OECD Economic Outlook, Volume 2025 Issue 1

2. Reigniting investment for more resilient growth

Summary

Weak investment has weighed on potential output growth since the global financial crisis (GFC), despite historically low financing costs and strong corporate profitability. Subdued aggregate demand and elevated uncertainty have dampened real business investment, but explain only around half of the investment shortfall since the GFC. In parallel, structural shifts, particularly the growing importance of digital assets and evolving corporate behaviour, have become more prominent. As economies have transitioned toward more digital and knowledge‑intensive production – accelerated by the artificial intelligence (AI) revolution – businesses have increasingly allocated investment toward software, data, computing hardware, and research and development. Firms have also channelled a lower share of their retained earnings and borrowed funds into productive investment, while requiring persistently high rates of return, or ‘hurdle rates’. These trends may be associated with underlying forces that restrain business investment and dynamism, including declining competitive pressures and the challenges in financing intangible investments. At the same time, residential investment has struggled to keep pace with strong housing demand, contributing to a steady erosion in affordability over the past few decades. Public investment – although showing some recent signs of recovery – has also been weak in many countries for an extended period.

Against this backdrop, the chapter outlines policy approaches to support a revival in investment, including by reducing policy uncertainty, strengthening macroeconomic stability to support growth and advancing structural reforms to reinvigorate business dynamism. Policies that foster competition and improve access to finance are needed to unlock new investment opportunities and boost innovation in many countries. Reforms to ease land-use and planning restrictions and rental market regulations would help expand residential investment and improve affordability. Finally, high-quality public investment – particularly in energy security and green and digital infrastructure, research and development, health, and education – is needed in many economies and can help boost productivity and long‑term economic growth.

A prolonged period of weak investment has weighed on potential output growth

Underlying growth prospects have weakened considerably over the past two decades, both in advanced and emerging‑market economies. Weak growth in the capital stock has been an important factor behind the slowdown in potential output per capita growth in many countries, alongside a decline in multi-factor productivity (MFP) growth. Potential output per capita growth fell by 0.8 percentage points in the median advanced country and 0.9 percentage points in the median emerging-market economy between the 2002‑2008 period and 2024. Weaker growth in capital per worker accounted for 0.5 percentage points of the decline in potential GDP per capita growth in the median advanced country, and 0.3 percentage points in the median emerging-market country. The slowdown in capital accumulation has weighed on potential growth across nearly all countries (Figure 2.1, Panel A), including those with relatively strong overall growth performance, such as India and China.

The aggregate slowdown in capital accumulation masks notable cross-country differences (Figure 2.1, Panel B). In the advanced economies, capital stock growth has been particularly weak in Japan, Italy, Greece and Portugal during the past 15 years. The United States has observed steadier growth, albeit still below levels observed in the period before the GFC. Capital stocks in emerging-market economies have grown slightly faster on average than in advanced economies, reflecting greater investment needs. Nevertheless, some major emerging-market economies, such as Brazil, Argentina and South Africa, have seen weak capital stock growth, while others, such as Chile, have experienced high growth rates, but still a marked slowdown in capital stock growth over the past two decades.

Figure ‎2.1. Weak capital accumulation has held back growth

Note: Panel A: Other factors include changes in labour utilisation and multi-factor productivity. Capital deepening is the rate of change in the capital stock per worker. Panel B: annual average growth rate of the capital stock at constant prices.

Source: OECD Economic Outlook 117 database; and OECD calculations.

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The slowdown in capital accumulation largely reflects the lasting impact of two major shocks – the GFC and the COVID‑19 pandemic – which led to notable declines in real investment from which most economies have recovered only partially. Total real investment, which measures the volume of gross fixed capital formation across the economy, contracted sharply during the GFC as economic growth weakened and financing conditions tightened. The subsequent recovery was relatively modest. Investment declined again during the pandemic, rebounding only partially thereafter, with other events such as Russia’s war of aggression in Ukraine and rising energy prices also weighing on capital formation. As a result, aggregate real investment volumes across advanced countries remained approximately 22% below their pre‑GFC trend and 7% below the pre-COVID trend at end-2024 (Figure 2.2, Panel A). An investment shortfall is also evident in emerging markets, though it developed more gradually, as investment was less affected by the GFC than in advanced economies. Investment in emerging-market economies on average is estimated to be approximately 33% below the pre-GFC trend, although it is slightly above the pre-COVID trend due to recent robust growth in India and Indonesia (Figure 2.2, Panel B). This investment slowdown has been widespread across countries. Most have continued to see weak capital formation in recent years, with a few exceptions, such as the United States, India and Indonesia, where investment growth has been relatively strong.

Figure ‎2.2. Real investment remains below the pre-GFC and pre-pandemic trends in many economies

Real total investment

Note: Real investment across 33 advanced economies and 13 emerging-market economies (Argentina, Brazil, Bulgaria, Chile, Colombia, Costa Rica, India, Indonesia, Mexico, Romania, South Africa, Thailand, and Türkiye). Weighted average using GDP PPP weights in 2015. GFC denotes the global financial crisis.

Source: OECD Economic Outlook 117 database; and OECD calculations.

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While the ratio of gross investment to GDP has risen in recent years in some countries, net investment - the addition to the capital stock after accounting for depreciation - remains weak across OECD countries. Since the pre-GFC period, average net investment rates across the OECD have declined by over 0.9 percentage points of GDP, from 2.5 to 1.6 per cent of GDP for the median country, with the fall in net investment strongest in the euro area. The overall decline in net investment has been primarily driven by the drop in business net investment - the largest share of total investment – though reductions in residential and public net investment have also contributed (Figure 2.3). The declines primarily reflect weakness in underlying investment volumes. The fall in prices of investment goods relative to overall prices played a significant role in the lower net investment‑to‑GDP ratios of the 1990s and early 2000s, but relative prices have since broadly stabilised in the post-GFC period.

Figure ‎2.3. Net investment-to-GDP ratios have declined since the global financial crisis

Net investment in OECD countries

Note: Net investment-to-GDP is defined as the ratio of gross fixed capital formation minus the consumption of fixed capital in current prices, to nominal GDP. Business investment includes the combined investment of the non-financial and financial sectors, while public investment refers to the investment undertaken by the general government. Based on 32 OECD countries for which sectoral investment data are available. The shaded area shows the interquartile range.

Source: OECD National Accounts database; and OECD calculations.

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Business investment has been held back by subdued demand, elevated uncertainty and structural factors

Business investment, which accounts for over 60% of total investment in the average OECD country, has remained comparatively weak in most economies for which data are available. Notable exceptions are the United States and France, where business investment has grown more robustly. The weakness has been widespread, affecting most sectors (Figure 2.4, Panel A) and both large and small firms (Hanappi, Millot and Turban, 2023). Changes in the sectoral composition – such as an increasing share of less investment‑intensive sectors such as services and a declining share of more capital-intensive manufacturing – seem to have played only a limited role. Instead, the decline in investment has been largely driven by within-sector dynamics (Figure 2.4, Panel B).

Figure ‎2.4. Business investment has been weak across sectors

Note: In Panel A, the graph plots the coefficient ${\mathrm{\beta }}_s$ from the regression $i_{c,t}^s={\mathrm{\alpha }}_c^s+{\mathrm{\beta }}^s\times t+{\mathrm{ϵ}}_{c,t}^s$ for each sector s, showing the average annual change in the net investment rate over the period 1997-2021, expressed in percentage points. This approach controls for country-specific time invariant factors. The sample covers the period from 1997 to 2021, and countries shown in Panel B, with the net investment ratio defined as gross fixed capital formation minus consumption of fixed capital, divided by value added, all in current prices. In Panel B, the graph presents a shift-share analysis for all countries with available data. This analysis decomposes changes in the investment rate into two components: a within-industry effect (reflecting investment changes within sector) and a between-industry effect (reflecting investment shifts in sectoral composition), following the methodology of Autor and Salomons (2018).

Source: OECD National Accounts database; and OECD calculations.

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Aggregate demand accounts for part of the weakness but investment ‘gaps’ remain

One key factor contributing to the weakness in business investment relative to earlier trends is more subdued growth in aggregate demand. In many countries, real output fell sharply following both the GFC and the pandemic, and recovered only partially relative to its pre-crisis trend. Corporate investment is closely linked to output growth, as stronger demand incentivises firms to expand capacity.

Empirical analysis based on an accelerator model suggests that weak aggregate demand is an important factor explaining business investment performance. Yet, it accounts for only around one‑third of the overall shortfall in real business investment relative to the pre‑GFC trend (Figure 2.5, Panel A) on average, for the 17 countries with available data. In contrast, the accelerator model suggests that business investment was broadly in line with output growth in the period leading up to the financial crisis. The remaining shortfall may be viewed as an investment ‘gap’, defined as the shortfall in investment not attributable to output developments. This investment ‘gap’ is around 17% of the predicted investment level on average and is even larger in some countries – exceeding 30% in Australia, Korea, and the Netherlands (Figure 2.5, Panel B).

Investment gaps have widened over time, pointing to the growing importance of non-demand factors in explaining weak investment. In the immediate wake of the GFC (2008-2011), the gap was small, suggesting that demand effects accounted for most of the investment weakness, although credit supply and debt overhangs may also have contributed. Between 2012 and 2019, the gap widened gradually, and from 2020 onward, the COVID-19 shock contributed to a further increase. On average, developments since 2020 account for roughly one-quarter of the unexplained slowdown in investment. The impact of the pandemic on the investment gap has been particularly sizeable in some countries, such as Belgium, Denmark and Sweden (Figure 2.5, Panel B).

Figure ‎2.5. Business investment ‘gaps’ are large across OECD economies

Decomposition of shortfalls in real business investment compared to pre-GFC trend

Note: The investment gap is calculated as the shortfall relative to predicted investment from a simple accelerator model that relates real business investment growth to its own lag and to current real output growth (Annex 2.A). Predicted real business investment is calculated from 2008 to 2023 as the fitted values from the model using actual growth rates of GDP and lagged investment. The overall shortfall in real business investment relative to the pre-GFC trend in 2023 is then decomposed into a part that is explained by the model, interpreted as demand (calculated as trend investment minus predicted investment) and an unexplained part, or ‘gap’ (calculated as predicted investment minus actual investment, as a per cent of predicted investment). The country sample includes 17 OECD countries for which data on real business investment are available. Panel A shows the results for the OECD aggregate, calculated as a weighted average of the countries in Panel B using GDP PPP weights. Panel B shows investment gaps in per cent of predicted investment, for countries with available data.

Source: OECD Economic Outlook 117 database; and OECD calculations.

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Investment ‘gaps’ cannot be fully explained by the cost of capital, company valuations and profitability

Business investment gaps have opened up despite a marked decline in the user cost of capital (UCC) across most economies. The UCC, which captures the cost of financing and maintaining capital –factoring in borrowing costs, relative prices, taxes, and depreciation – has trended downward steadily over the past few decades until the recent moves to tighten monetary policy (Figure 2.6, Panel A). Borrowing costs dropped to historically low levels following the monetary policy easing in response to the GFC, and while they have risen more recently, they remain well below long-term averages (Figure 2.6, Panel B). Effective corporate tax rates have also declined, with several OECD countries having reduced the main statutory rate (Figure 2.6, Panel C), and changes to tax provisions have further lowered the effective cost of capital in some countries. Simultaneously, the price of investment goods relative to overall output prices fell throughout the 1990s and early 2000s, largely due to sustained improvements in the quality and efficiency of ICT-related capital (Figure 2.6, Panel C).

At the same time, corporate valuations have remained favourable to higher investment. When the ratio of a firm's market valuation to the replacement cost of its assets (Tobin’s Q) is above one, markets expect firms can earn returns on new investment that exceed investment costs. Firm-level data from listed companies in a subset of OECD countries indicate that Tobin’s Q has remained above this threshold since the GFC. In the United States and some Scandinavian countries, valuations have risen strongly in recent years, whereas valuations have been flat or increased only gradually in most European and other advanced economies (Figure 2.6, Panel D).1

Figure ‎2.6. The cost of capital has fallen and company valuations have held up

Note: Panel A: The user cost of capital UCC is calculated using the relative price of investment, the real interest rate based on the 10-year government bond yield and 10-year ahead inflation expectations from professional forecasts, the depreciation rate, the statutory corporate tax rate and the share of debt in corporate liabilities (debt plus equity). Panel C: The relative price of investment is measured as the ratio of the investment and GDP deflators. Panel D: Tobin's Q is calculated as the sum of market capitalisation and liabilities, minus common equity, divided by total assets using Worldscope data. In Panels A, B and C, the country sample includes 15 OECD countries for which data are available (Australia, Belgium, Canada, Denmark, Finland, France, Germany, Japan, Korea, the Netherlands, New Zealand, Sweden, Switzerland, the United Kingdom, and the United States). Median values are shown. In Panel D, for Europe, the median is calculated using data from a subset of countries with larger stock markets, covering Austria, Belgium, Switzerland, Germany, Denmark, Spain, France, Italy, the Netherlands, and Sweden. The ‘Other’ category represents the median of Australia, Canada, the United Kingdom, and Japan.

Source: OECD Economic Outlook 117 database; OECD National accounts database; Oxford University Centre for Business Taxation Database; LSEG Worldscope Fundamentals; Consensus Economics; and OECD calculations.

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Firms’ profitability and cash resources also do not appear to have acted as constraints. Subdued corporate investment in advanced economies since the GFC has coincided with the corporate sector shifting from being a net borrower to net lender on aggregate (Figure 2.7, Panel A). Gross corporate savings as a share of GDP have increased in more than half of the OECD countries with available data, driven by stronger profits, proportionally lower tax payments, and lower interest expenditures, although this has been partially offset by higher dividends in some countries including the United States, Canada and the Netherlands (Figure 2.7, Panel B). Overall, the ratio of net investment to net sales has also declined, implying that higher sales have not been proportionally matched with higher investment.

Taken together, this suggests that capital costs, valuation signals and firms’ profitability cannot explain the weakness in business investment. Moreover, proxy measures of the UCC, Tobin’s Q and firms’ profitability are not statistically significant when added to the accelerator model (see Annex 2.A), pointing instead to the growing importance of other determinants in explaining investment, particularly since 2012. These are likely to include heightened economic uncertainty and structural factors, such as changing investment patterns towards digital assets and evolving corporate behaviour.

Figure ‎2.7. Strong corporate profitability has not translated into higher gross fixed capital investment

Note: Panel A contains 33 OECD countries. It shows gross fixed capital formation and gross savings for the non-financial corporate sector as a per cent of nominal GDP, aggregated up to the OECD level. The difference between gross fixed capital investment and gross savings is approximately equal to net lending, but can vary depending on changes in inventories, other non-financial produced assets, and net capital transfers. In Panel B, the decomposition is based on the distribution of income account for the non-financial corporate sector within the System of National Accounts: Gross operating surplus = Gross saving + Net property income paid + Current taxes on income + Social transfers + Other transfers, where Net property income paid = Dividends - reinvested earnings on foreign direct investment + net interest paid + rents on land (for more information see (Chen, Loukas and Brent, 2017)).

Source: OECD National Accounts database; and OECD calculations.

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Elevated uncertainty is likely to have held back investment

Elevated uncertainty – both macroeconomic and policy related – is likely to have weighed on investment incentives and encouraged precautionary cash accumulation. Firms may hesitate to commit to long-term capital spending projects when the outlook for global demand, trade policy, or regulatory frameworks is unclear. Economic policy uncertainty indicators started to increase steadily around 2016, and trade policy uncertainty became elevated in the 2017-2020 period (Figure 2.8, Panel A). Empirical estimates (Box 2.1) suggest policy uncertainty may have accounted for approximately one-sixth of the overall investment shortfall relative to the pre-GFC trend (Figure 2.5, Panel A), and around one-quarter of the ‘gap’ across OECD countries (Figure 2.5, Panel B). Furthermore, recent survey evidence suggests that uncertainty is increasingly a major obstacle to investment for firms (Figure 2.8, Panel B).

More recently, measures of policy uncertainty have spiked due to heightened concerns about economic risks from tariffs on international trade. Estimates suggest that if these levels of high‑uncertainty persist, the resulting decline in investment growth could lead to real investment being up to 1.4 percentage points lower by end‑2026 (Box 2.1). In contrast, if policy uncertainty reverts to the average levels observed over the 2015-2019 period, investment could be 1.8 percentage points higher by end‑2026 compared to a baseline where economic policy uncertainty remains at current levels.

Figure ‎2.8. Uncertainty has increased, becoming a greater obstacle to investment

Note: For Panel A, the Economic Policy Uncertainty (EPU) is based on Baker, Bloom and Davis (2016) and the Trade Policy Uncertainty (TPU) index is from Caldara et al (2019). The EPU index is a nominal GDP-weighted average of national EPU for 21 countries: Australia, Brazil, Canada, Chile, China, Colombia, France, Germany, Greece, India, Ireland, Italy, Japan, Korea, Mexico, Netherlands, Russia, Spain, Sweden, the United Kingdom and the United States. The TPU index is based on automated text searches of the electronic archives of seven newspapers. Panel B shows the share of firms responding positively to the survey question Q.38 in the European Investment Bank EIB) Investment Survey: ‘Thinking about your investment activities, to what extent is each of the following an obstacle? Is it a major obstacle, a minor obstacle or not an obstacle at all?’, the average score is shown for EU countries and the United States.

Source: www.policyuncertainty.com; European Investment Bank (EIB) Investment Survey; and OECD calculations.

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Box ‎2.1. Economic policy uncertainty and business investment in OECD countries

Policy uncertainty has increased sharply in recent months across OECD countries. Elevated uncertainty can be a drag on business investment as firms often delay or scale back capital spending when future conditions are unclear. Earlier studies have found that the increase in US economic policy uncertainty in the 2005‑2012 period was associated with a peak decline of 6% in US gross fixed investment (Baker, Bloom and Davis, 2016). Focusing on trade policy uncertainty, an increase equivalent to that observed during the 2018 period of higher tariffs has been found to be associated with a decline in private investment of 1‑2% (Caldara et al., 2019).

The impact of policy uncertainty on investment in OECD economies is quantified using a panel Vector Autoregression (VAR) model with quarterly data. The model includes real business investment, GDP, the GDP deflator, short-term interest rates and a measure of economic uncertainty, the Economic Policy Uncertainty (EPU) index, developed by Baker, Bloom and Davis (2016), capturing both country‑specific and global shocks. Results suggest that a one standard deviation increase in economic policy uncertainty reduces business investment growth by around 1 percentage point after one year, with the impact peaking after four quarters (Figure 2.9). This suggests that the increase in uncertainty during recent years may have reduced annual investment growth by 0.4 percentage points on average across OECD countries, accounting for approximately one-quarter of the investment ‘gap’ shown in Figure 2.5.

To illustrate the potential future implications, two scenarios are considered:

• Lower economic policy uncertainty would lift investment growth. In a “confidence rebound scenario” where uncertainty declines from its value at the end of 2024 to the average levels over the 2015‑2019 period by end-2025, the associated cumulative gain in business investment would be around 1.8 percentage points by end-2026 as compared to a baseline where economic policy uncertainty remains at current levels.

• However, if current levels of high uncertainty persist and only decline towards their 2024 average, the resulting decline in investment growth could lead to real investment being 1.4 percentage points lower by end-2026.

Figure ‎2.9. An uncertainty shock decreases business investment and GDP

Note: Panels show the impact of a one standard deviation increase in economic policy uncertainty on business investment (Panel A) and GDP (Panel B). Grey shaded areas depict 90% confidence bands. The results are based on a panel VAR model for nine OECD countries with available data on business investment and economic policy uncertainty (Australia, Canada, Germany, France, Japan, Korea, Sweden, the United Kingdom and the United States). The panel VAR specification features four lags of growth rates of GDP, GDP deflator, business investment, economic policy uncertainty (Baker, Bloom and Davis, 2016), the first difference of short-term interest rates and a linear trend. The model is estimated at quarterly frequency over 1997Q1 to 2024Q4. The identification of the structural shock to economic policy uncertainty rests on a Cholesky triangularisation of the variance-covariance matrix of the reduced-form residuals. The uncertainty shock is ordered first, implying that it affects all other variables at time t.

Source: OECD Economic Outlook 117 database; and OECD calculations.

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Weaker business investment has coincided with structural shifts in the composition of investment, corporate behaviour and market dynamism

Weak demand and elevated uncertainty together appear to account for around half of the cumulative shortfall in real business investment relative to the pre-GFC trend. The remaining weakness is likely to be related to broader structural changes within the economy. As economies transition toward more digital and knowledge‑intensive production – accelerated by the artificial intelligence (AI) revolution – investment has increasingly shifted toward intangibles, especially digital assets. At the same time, firms have channelled a lower share of their retained earnings and borrowed funds into productive investment, while maintaining persistently high required rates of return, or ‘hurdle rates’. Both these trends are likely to be associated with underlying factors that dampen investment, including declining competitive pressures and the rise of dominant firms, particularly in the digital sector, and difficulties in financing intangible investments.

Investment in digital and knowledge-based assets has increased

The transition towards a more digital and knowledge-intensive economy in recent years has had a significant impact on the composition of business investment. Investment has been channelled into knowledge-based intangible assets, such as software, data, and research and development (R&D), and complementary tangible investments, such as ICT hardware, including servers, networking equipment, and cloud infrastructure (André and Gal, 2024). Together, these assets are an important driver of firm productivity and innovation (Corrado et al., 2021).

Real investment in digital and knowledge assets has outpaced other asset classes across most advanced economies (Figure 2.10). Real investment in software has increased three-fold since 2008 on average in OECD economies, while investment in ICT hardware and R&D has grown by around 100% and 45%, respectively, over the same period, compared to aggregate growth of 12% for machinery and a 7% decline in investment in structures. Digital investment has expanded particularly rapidly in countries such as the United States and France, which have also seen strong growth in overall investment. In contrast, several countries, including Germany, have witnessed more modest increases. Investment has expanded particularly rapidly in tech-related firms (Figure 2.11). Firm-level data also show that AI-related companies invest in physical capital at nearly twice the rate of other firms, with their R&D investment rates more than three times higher (Figure 2.12).

At the same time, firms appear to not be undertaking all the available profitable marginal investments that lower costs of finance should encourage. The average pre-tax rate of return on corporate capital assets has remained high in many economies in recent years, after dropping during the GFC and pandemic (Figure 2.15, Panel A). There is also evidence that required returns on investment have increased, since the gap between hurdle rates – the minimum expected return a firm requires to proceed with an investment – and capital costs has widened (Figure 2.16, Panels A and B) (OECD, 2015; Shah, Bunn and Melolinna, 2024). While rising policy uncertainty may have contributed to higher risk premia and thus higher hurdle rates, the scale of the increase points to additional underlying structural factors.

Figure ‎2.10. Investment patterns have shifted towards the digital and knowledge-based economy

Average annual growth in real gross investment by asset class, 2008-2022

Note: ICT machinery includes both computer hardware and telecommunications equipment. 'Other' includes Australia, Canada, Israel, Japan and the United Kingdom. OECD refers to the weighted average of 32 OECD countries for which data are available.

Source: OECD National Accounts database; and OECD calculations.

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Figure ‎2.11. Tech firms lead the way in digital and knowledge investment growth

Digital and knowledge-related real investment in tech vs non-tech sectors, median of OECD countries

Note: The tech sector corresponds to Sector J (services related to information and communication) in the national accounts NACE Rev. 2 classification. The sample includes countries for which sector-asset data are available until 2023, covering Australia, Austria, Canada, France, Japan, the Netherlands, the United Kingdom and the United States.

Source: OECD National Accounts database; and OECD calculations.

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Figure ‎2.12. AI-related firms increasingly invest more than other firms

Gross investment-to-sales ratio

Note: Gross investment-to-sales ratio is in current prices. AI firms are identified based on the companies covered by the Xtrackers Global AI and Big Data ETF (ISIN: IE00BGV5VN51) – a financial product that seeks to track the Nasdaq Global AI and Big Data stock market index. The index is designed to track the performance of companies that are most active in filing patents relating to Deep Learning, Natural Language Processing, Image Recognition, Speech Recognition & Chatbots, Cloud computing, Cyber Security, and Big Data. The constituents were derived as of end of March 2025. Stock markets covered include Canada, China, Finland, France, Germany, Hong Kong (China), Israel, Japan, Korea, Chinese Taipei, the United Kingdom, and the United States. There are some known issues around the measurement of R&D in company accounts which are examined in forthcoming OECD work (OECD, 2025a).

Source: LSEG Worldscope Fundamentals; and OECD calculations.

The relatively stronger growth of digital and knowledge-based investment has not been sufficient to offset the impact of rising depreciation and weak tangible investment. Thus, net business investment as a share of GDP has declined across most OECD countries, despite a notable rise in digital and R&D investment (Figure 2.3). This decline reflects sluggish growth in traditional tangible investment categories — such as infrastructure and machinery — which still account for the largest share of business investment, alongside the higher depreciation rates for digital and knowledge-based capital (Figure 2.13, Panels A and B). On average, digital and knowledge-based assets now make up just over 35% of total capital formation, in current prices, up from around 28% at the turn of the century (Figure 2.13, Panel C).2 As investment has shifted toward these faster-depreciating assets, the overall depreciation or ‘scrapping’ rate has risen.

Figure ‎2.13. Declines in net business investment are driven by rising depreciation and weak non‑digital tangible investment

Note: Panel A: Net business investment-to-GDP ratio in current prices. The sample includes 19 OECD countries where a full asset breakdown of investment is available. 2023 data or latest available. Panels B and C cover private and public non-residential investment. Panel B: “Other” refers to non-ICT machinery and non-residential structures and buildings. ICT includes ICT equipment, which is the sum of computer hardware and telecommunications equipment. For each asset type, the implied depreciation rates are calculated using data for the net capital stock and gross fixed capital formation, both in real terms. Panel C: investment by asset as a share of non-residential investment, expressed in nominal terms.

Source: OECD national accounts; and OECD calculations.

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Corporate behaviour has shifted towards greater cash accumulation, higher shareholder payouts and rising required returns

Instead of investing in fixed assets, firms have increasingly allocated savings toward accumulating financial assets or distributed earnings to investors through dividends and share buybacks. The increase in corporate net financial asset positions has been predominantly associated with the accumulation of financial assets rather than reductions in debt (Figure 2.14, Panel A). Firm-level data suggest that rising corporate gross operating surpluses have been associated with increased cash holdings and higher shareholder payouts, mainly through dividends (Figure 2.14, Panels C and D). In the United States, Canada, Switzerland, and the United Kingdom, share buybacks have also contributed significantly to this trend.3 Concurrently, the number and value of corporate mergers and acquisitions remained elevated during much of the post-GFC period, particularly in the United States and Europe, indicating that financial resources were utilised to acquire existing capital assets from other companies, rather than to expand the overall capital stock through internal investments (Figure 2.14, Panels E and F). Another possible use of corporate savings would be to invest in other countries, but there is little sign of this in outward foreign direct investment flows from the major economies, other than in Japan (Figure 2.14, Panel B).

Figure ‎2.14. Firms have used savings to accumulate financial assets and return funds to shareholders

Note: In Panel A, debt is proxied by total financial liabilities less equity, from consolidated financial balance sheets. Panel B displays the weighted average of net FDI inflows and net FDI outflows as a share of gross fixed capital formation for G7 countries, with weights based on GDP at PPPs. Data in Panels C and D are based on the listed firms covered in the Worldscope database. The sample includes countries with at least 150 firms in each year since 2000 and with at least three consecutive years of non-missing observations for sales, common equity, and total assets. Indicators shown in Panel C and D are calculated at the country-year level, based on cumulated values across all firms in each country and year. The 2002-2007 average is calculated based on the country-level indicators. Cash holdings is the sum of cash and short-term investments. Total payout is the sum of dividend and share repurchase payments. Firm-level data for each country are cleaned by dropping the extreme 0.5% of values. For Switzerland and India, 2024 data are from 2023.

Source: OECD National Accounts database; World Bank data for FDI; LSEG Worldscope Fundamentals; Institute for mergers and acquisitions and alliances; and OECD calculations.

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Figure ‎2.15. The rate of return on corporate capital assets remains high

Rate of return on corporate fixed assets

Note: The return on capital is calculated as the corporate gross operating surplus less consumption of fixed capital relative to net fixed assets where available. Euro area refers to the weighted average of 13 euro area countries. OECD refers to the weighted average of 23 countries.

Source: OECD National Accounts database; and OECD calculations.

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Figure ‎2.16. The gap between financing costs and hurdle rates has increased

Note: Predicted values for firms’ perceived cost of capital and hurdle rates based on information provided during corporate earnings calls, investor conferences, and similar events. The description of data collection and computation can be found in Gormsen and Huber (2023). Panel A is based on an average of the countries listed in Panel B.

Source: Gormsen and Huber (2023).

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Shifts in the composition of investment and corporate behaviour have coincided with rising market concentration, higher markups and difficulties in accessing finance

Market concentration has risen and business dynamism declined across advanced economies. These developments are increasingly linked to weak investment (Calligaris et al., 2024). Measures of industry concentration have risen in Europe and the United States, while product market concentration has also increased in European economies (Figure 2.17). At the same time, data from listed firms show a notable increase in markups – measured as the ratio of total revenue to the cost of goods sold – across most advanced economies, with Italy being a notable exception (Figure 2.18).4 Among emerging-market economies, markups have increased in India and South Africa but eased slightly in Brazil, Chile, Indonesia and Mexico. Net investment rates among listed firms have declined in all countries apart from Korea over the same period.

In parallel with rising market concentration, business investment has also become increasingly concentrated among a small group of highly profitable “superstar” firms (Autor, 2020). This trend is closely linked to shifts in the composition of investment, as the greater scalability of intangible assets tends to boost returns for a limited number of firms, reinforcing “winner-takes-most” dynamics (Haksel and Westlake, 2018). The rise in overall market power appears particularly pronounced in the digital sector (Nicoletti, Vitale and Abate, 2023). These dynamics are further reinforced by growing concentration in institutional ownership. The widespread use of passive investment vehicles and consolidation in the asset management sector mean that many competing firms now share common large shareholders (Schmalz, 2017). Ownership concentration can weaken incentives for competition and has been associated with lower corporate investment (Gutiérrez and Philippon, 2018; Azar, Schmalz and Tecu, 2018).

Figure ‎2.17. Industry and product market concentration has increased

Concentration trends in industries and product markets

Note: The chart is taken from (Calligaris et al., 2025) and shows the unweighted average across industry- or product- country combinations of the cumulative growth of market concentration. The concentration measure used is the top four concentration ratio in product/industry $s$ and country $c$ at time $t$, which captures the sales of the biggest four firms relative to total market sales, in each year. The products included are those available in the Euromonitor data, while the industries are those that correspond to these products. For Panel A, the countries included in the sample are Austria, Belgium, Bulgaria, Croatia, Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, the Netherlands, Poland, Portugal, Romania, the Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom. The data cover 2012-21.

Source: Calligaris et al. (2025).

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Figure ‎2.18. Markups have increased across OECD countries

Note: Indicators are calculated at the country-year level, based on cumulated values across all firms in each country and year. The 2002-2007 average is calculated based on the country-level indicators. The markup is the ratio of revenues to the cost of goods sold. Firm-level data for each country is cleaned by dropping the extreme 0.5% of values.

Source: LSEG Worldscope Fundamentals; and OECD calculations.

Increased market concentration can suppress investment through several channels. One is that dominant firms may restrict output and raise prices rather than invest in expanding capacity, particularly when competitive pressure is limited (Gutiérrez and Philippon, 2017). Another mechanism is that only large ‘superstar’ firms have the financial resources, managerial capability, and know-how to make large‑scale investments with uncertain payback periods, effectively crowding out investment by smaller, less productive, or new firms (Crouzet and Eberly, 2019). Firm-level data suggests that large firms account for a higher share of investment relative to their output, although the gap has not increased over time (Hanappi, Millot and Turban, 2023). In reality, the relationship between market power and investment is likely to be nuanced, and firm specific. For example, firms may first achieve market power through innovation and efficiency, gaining scale through network effects and intangible synergies. Over time, however, some may shift their focus from innovation and fixed capital investment toward rent-seeking strategies, such as regulatory capture and lobbying, to preserve their dominant position (Akcigit and Ates, 2021).

The availability of finance is a second key channel connecting the observed rise in intangible assets and precautionary corporate behaviour such as cash accumulation and high hurdle rates. Investment in software, data, and R&D as well as other intangibles, is harder to finance through bank loans, as these assets are more difficult to value and hence use as collateral. As a result, firms may need to self-finance these assets through retained earnings and higher cash holdings to reduce dependence on external financing (Demmou, Stefanescu, and Arquie, 2019), reducing available resources for investment. These constraints can be particularly binding for smaller firms and those operating in bank-based financial systems with less developed capital markets.

Taken together, increased market concentration and financing challenges for intangibles provide additional plausible explanations for the persistent weakness in business investment. The relative importance of these factors likely varies across countries, sectors, and firms. Other factors may also have played a role. Rising investment costs – including limited land availability, planning delays, regulatory burdens, and implementation capacity constraints – can also deter firms from launching new projects. Moreover, the growing tendency of firms to prioritise shareholder payouts over reinvestment may reflect increasing financialisation (Gutiérrez and Philippon, 2017) and incentives such as shareholder pressure to shift corporate strategy toward maximising short-term financial returns at the expense of long-term productive investment.

Other structural trends – such as ageing populations and labour shortages - may also have restrained business investment, particularly in advanced economies. When firms anticipate slower growth in the working-age population, they may revise down expected demand for goods and services, reducing the need to expand productive capacity. This may more than offset any stimulative effects on investment from the downward pressure on real interest rates associated with higher savings in ageing populations — although this effect may also wane as retirees dissave (Eggertsson, Mehrotra and Robbins, 2019). Meanwhile, persistent skill shortages have emerged in some countries and sectors (OECD, 2024a), with over 50% of EU and US firms identifying the scarcity of skilled staff as a major obstacle to investment (Figure 2.21 Panel B). If firms are unable to find the necessary skills to implement, operate or maintain new capital – and fully reap their benefits -, they may postpone investment projects, particularly high-skill, high-tech investments that require complementary human capital, such as ICT and green technology.5

Housing investment has fallen short of demand, reducing affordability

Residential housing investment accounts for around a fifth of total of total investment across OECD countries and has also slowed in recent decades (Figure 2.19, Panel A). Following a period of strong housing investment in some economies prior to the GFC, the subsequent tightening in credit conditions, household deleveraging, and the marked downturn in many housing markets contributed to a dramatic fall in residential investment during 2008-09.6 Although growth in housing investment eventually recovered, the past decade has seen a further steady decline. This was interrupted only briefly by a spike in activity following the pandemic in the context of low interest rates, increased demand for larger living spaces and government support measures. Real housing investment has contracted in recent years and continued to do so in most OECD countries over the year to the fourth quarter of 2024.

A structural shortfall in housing investment relative to demand has contributed to rising house prices. Several factors have fuelled housing demand, including urbanisation, population growth, rising incomes, increased immigration, a shift toward smaller households, and greater access to mortgage credit (OECD, 2021). The supply-demand imbalance is a key reason why house prices and rents in many OECD countries have risen significantly faster than both inflation and household incomes over time, eroding affordability. These pressures are particularly acute in major cities and economically dynamic regions, where growth in demand for housing has far outpaced supply. Consequently, housing costs have absorbed an increasing share of household budgets, often at the expense of other essential spending categories such as food and transport (Figure 2.19, Panel B). Between 2000 and 2023, the share of consumption spent on housing rose by an average of close to three percentage points, reaching 17% in the median OECD country.

The low responsiveness of housing supply to growing demand reflects a range of structural and regulatory constraints (OECD, 2021). The time required for planning and construction means supply adjustments are sticky, allowing price pressures to build up. In addition, rising construction and renovation costs (OECD, 2023), partly driven by stricter energy efficiency and environmental sustainability standards, have added to overall investment costs. Demand has been particularly concentrated in job-rich urban areas, where geographical limitations and regulatory restrictions, including land-use and zoning rules, are most restrictive (Cournède, De Pace and Ziemann, 2020). Other factors, such as rental market regulations, landlord‑tenant laws, and labour shortages also affect the efficient functioning of housing markets and the construction sector, potentially discouraging investment in both the construction and maintenance of dwellings. In addition, persistently low productivity growth in the housing construction sector—often attributed to regulatory factors—may further undermine cost-efficiency and scalability (D’Amico et al., 2024).

Figure ‎2.19. Housing investment has not kept pace with demand, weakening affordability

Note: Panel A: Real gross fixed capital investment in residential housing, weighted average of 17 OECD countries. The shaded area shows the interquartile range. Panel B: Consumption expenditures are broken down by the classification of individual consumption according to purpose.

Source: OECD Economic Outlook 117 database; OECD National Accounts database; and OECD calculations.

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Public investment has picked up but remains below pre-GFC levels

Public investment – accounting for around one sixth of total investment across OECD countries – declined significantly in many economies in the aftermath of the GFC. The decline was largely due to fiscal consolidation efforts, particularly in euro area countries that faced acute sovereign debt pressures (OECD, 2015). In contrast, the policy response to the pandemic was different, with many governments raising public investment to support the recovery (Figure 2.20, Panel A). This was especially evident in the European Union, where initiatives such as the NextGenerationEU funds have played a central role in boosting investment. A substantial share of these recovery packages was directed towards investment in renewable energy, energy efficiency, and sustainable transport infrastructure to support demand and progress toward long-term climate goals.

Despite the recent upturn in some countries, critical public investment needs remain. Net public investment – after accounting for the depreciation of the existing capital stock – remains below pre-GFC levels (Figure 2.3, Panel C), raising concerns about deteriorating infrastructure in some countries and sectors. The stock of public capital relative to GDP has stagnated or declined over the past decade in many countries. Marked sectoral differences have emerged: while the share of public investment has increased in areas such as energy, defence, and healthcare, other sectors such as transport have declined (Figure 2.20, Panel B). Such declines can lead to quality shortfalls. The perceived quality of transport infrastructure declined in countries such as the United States and the United Kingdom, for example, in the years prior to the pandemic (World Economic Forum, 2019), while declines in education performance were signalled by PISA (Programme for International Student Assessment) scores declining across many OECD countries between 2018 and 2022. Moreover, insufficient public investment may also constrain private investment, as inadequate transportation, energy or digital infrastructure can limit firms’ growth and investment opportunities.

Recent announcements of further increases in defence spending – particularly among European countries in response to heightened geopolitical tensions – are expected to result in some increase in public spending. However, the overall boost to public investment may be modest, as only around 20% of defence spending tends to be allocated to capital investment (see Chapter 1).

Figure ‎2.20. Public investment was supportive in many countries during the aftermath of COVID-19

Note: Panel A shows the four-year change in the public investment-to-GDP ratio following the global financial crisis (GFC) and the COVID-19 pandemic. For the GFC, the change is the difference between the ratio in 2012 and the average ratio over 2006–2008. For the pandemic, the change is the difference between the ratio in 2023 and the average ratio over 2017–2019. Panel B shows the percentage point change in public investment shares (public investment in each category in per cent of total public investment) between 2016 and 2022 (the latest data point available in the COFOG dataset for a broad range of countries).

Source: OECD National Accounts; OECD COFOG database, and OECD calculations.

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Public policy reforms can help reinvigorate investment

Public policies help shape the factors identified above as underpinning recent investment trends. Clear and predictable measures that incentivise business investment are particularly important, given business investment has been the main component behind the weakness in net aggregate investment across countries. Key messages from the analysis above are the importance of reducing policy uncertainty, promoting competition and business dynamism and alleviating financing constraints for intangible investment. These are consistent with many of the country‑specific policy recommendations for boosting investment in Chapter 3 and summarised in Panel A of Figure 2.21, and would help overcome some of the key obstacles to investment commonly cited by businesses (Figure 2.21, Panel B). Outside of the business sector, there is scope to boost housing investment in some countries through regulatory reforms that include the easing of land-use restrictions and rental market regulations. In addition, high-quality public investment – particularly in green and digital infrastructure, research and development, health, and education – is needed in many economies and can boost potential output growth, especially if it crowds-in private investment spending.

Figure ‎2.21. The major barriers to private investment can be influenced by government policy

Note: Panel A, policy recommendations are taken from the Economic Outlook 117 country notes (see Chapter 3) for 54 countries. The figure shows the number of countries with policy recommendations to boost investment in each given category. Panel B is based on responses to the question: 'Thinking about your investment activities, to what extent is each of the following an obstacle? Is it a major obstacle, a minor obstacle or not an obstacle at all?' from the European Investment Bank Investment Survey 2024 from responding United States and European firms.

Source: OECD Economic Outlook 117 database; European Investment Bank, EIB Investment Survey 2024: European Union overview; and OECD calculations.

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Reducing policy uncertainty would support stronger investment growth

Clear and predictable public policy is needed to assuage economic policy uncertainty and help rejuvenate investment growth, as highlighted in Box 1. While the predominant factor behind the recent rise in economic policy uncertainty in advanced economies has been higher trade policy uncertainty, available measures also show increased uncertainty since early 2024 in categories related to fiscal, regulatory and climate policies. As such, improving the general clarity and predictability of economic policies in all areas of government could underpin stronger investment rates. This is a policy recommendation contained in many of the country notes in Chapter 3, including for the United States, Hungary, Korea and Türkiye. One potential channel is that reduced uncertainty could prompt businesses to reduce the risk-premia incorporated in the hurdle rates used for investment decisions (European Investment Bank, 2024). Specific approaches to reduce policy uncertainty may include:

• Conducting trade policy through a transparent and rules-based system with efforts made by governments to avoid introducing sudden policy changes that are unpredictable for businesses and consumers. Working together within the global trading system to find ways of addressing concerns with current trading arrangements could also help governments provide certainty about the future.

• Reducing fiscal policy uncertainty by legislating and implementing credible medium‑term strategies for achieving sustainable public finances amid rising fiscal pressures (e.g. from population ageing, climate change and defence spending). Strengthening fiscal frameworks by reinforcing transparent, rules-based approaches – while ensuring that fiscal rules are designed with well-defined, credible escape clauses – can help maintain policy credibility while preserving flexibility in the face of major shocks. Implementing stable and predictable tax rules, combined with clear dispute resolution mechanisms, can also help mitigate uncertainty (Box 2.3).

• Reducing complexity and improving transparency around domestic structural policy changes in areas such as regulation of product and labour markets, migration policy and the financial system. Undertaking robust and transparent regulatory impact assessments would help give investors greater certainty. In addition, efforts to build a strong consensus around structural reforms by working with key stakeholders will support their longevity.

• Affirming ongoing international commitments to mitigate climate change and outlining the policy approach to achieving climate commitments. At the same time, implementing well-designed adaptation measures that minimise the potential economic cost of future disruptions from climate change would provide greater certainty about the future operating environment.

Various framework conditions shape the incentives to invest

Policies and institutional arrangements shape the incentives of firms to invest, their ability to attract the required resources to do so and overall economic stability. Sound macroeconomic policies and a healthy financial system are the foundation of strong and resilient investment growth. Monetary policy should focus on achieving low and stable inflation and any additional statutory objectives. In some emerging market and developing economies, additional efforts to entrench credible monetary policy frameworks could provide greater monetary policy certainty and help anchor inflation expectations. In addition, macroprudential policy tools should be developed and deployed where necessary to guard against the build-up of systemic financial risks that might become the basis for future financial shocks and impede access to finance.

Structural reforms can promote business dynamism and encourage firms to sharpen their focus on innovating and investing to stay ahead of competitors. Reducing the cost of regulations to businesses, both through reforming de jure regulations and implementing them in a way that does not unnecessarily raise costs, promotes firm entry and the ability of successful firms to expand. This can help mitigate trends towards rising market concentration, including in markets based around new intangible assets such as artificial intelligence technologies. Country-specific policy recommendations to promote investment by improving aspects of competition policy are made in the majority of country notes in Chapter 3 (Figure 2.21, Panel A). In emerging-market economies, clear and predictable regulatory frameworks can also reassure foreign investors about the operating environment.

While, in theory, more restrictive domestic regulations could simply encourage firms to invest abroad, this is only an option for a subset of firms in certain sectors, with foreign investment more likely to be determined by a need to enter foreign markets, or acquire resources, or link to research or financial centres. Indeed, the available evidence does not support the notion that foreign investment is a substitute for domestic investment (Desai et al., 2005; Goldbach et al., 2019), with the importance of a wide variety of structural policies for domestic investment growth empirically well established (Égert, 2021).

New OECD estimates indicate that reducing product market regulation in network industries is associated with an increase in the capital stock in downstream business sectors. Policy experiments suggest that network sector deregulation between 1980 and 2023 could have raised the capital stock by around 4% in the average OECD economy, with gains reaching 10% in manufacturing and 5% in business services (Figure 2.22, Panel A). Looking ahead, bringing regulations in more highly-regulated economies towards the regulatory levels of their least‑regulated peers could raise the economy-wide capital stock by up to 1.5%, with notably larger impacts for the manufacturing sector (Figure 2.22, Panel B). The effective design and implementation of product market regulations can also be hampered by the influence of lobbying activities. Reforms that improve the transparency and accountability of lobbying could address this and weaken the potential for regulations to be captured by incumbent firms and fuel rising market concentration (OECD, 2024b).

Figure ‎2.22. Investment would benefit from further product market reforms

Note: Panel A estimates are based on Dynamic Ordinary Least Squares regression results of how upstream regulation in network sectors, captured by the OECD’s REGIMPACT indicator, affects the capital stock (see Andrews et al. 2025 for further details). Panel B shows the potential capital stock gains from three reform scenarios that are based on measures of barriers to entry in network sectors in 2023: (1) convergence of the three most regulated OECD countries to the regulatory levels of the three least regulated (in orange); (2) convergence of the most regulated countries to the OECD average (in green); and (3) convergence of the OECD average to the benchmark set by the three least regulated countries (in blue).

Source: Andrews et al. (2025).

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Well-functioning insolvency frameworks promote business dynamism by encouraging firms to invest and resources to be efficiently allocated from weaker exiting businesses to higher performing ones. At the same time, overly stringent bankruptcy regimes can deter risk-taking, weighing on innovation and bias firms’ choice of capital structure towards tangible investments at the expense of intangibles (Garcia‑Posada and Mora-Sanguinetti, 2014). This is highlighted by OECD analysis showing that the economic gains from lowering barriers to efficient corporate restructuring increase with a sector’s intangible asset intensity (André and Demmou, 2022). Many countries have undertaken important reforms to insolvency frameworks over the past decade. Between 2016 and 2022, there was particularly notable progress in Europe and Canada (André and Demmou, 2022). Nonetheless, there remains scope for additional regulatory efforts in most countries to streamline insolvency processes, refine restructuring tools and improve the treatment of failed entrepreneurs.

The stringency and complexity of land use regulations influence business dynamism and housing investment by determining the activities that can be undertaken in a certain location. More stringent and complex land use provisions can be a barrier to firm entry and moderate investment in physical assets in some sectors such as retail trade, as well as dwelling investment. Reducing complexity and introducing greater flexibility in zoning systems, including by being less prescriptive about the specific activities that can be undertaken on a parcel of land, can enable firm entry and growth, as well as the ability of the economy to adapt to ongoing structural change. Based on the country notes in Chapter 3, such recommendations appear to be particularly relevant in Australia, Austria, Croatia and Sweden. Sub-national governments are often responsible for land use regulations and the implementation of planning approvals. Ensuring these administrations have sufficient fiscal incentives to reduce the complexity of regulations and streamline approvals can be important. An example is Switzerland, where local government finances are heavily reliant on property taxation and there is significant flexibility afforded to authorities to set the applicable tax rates. Efforts to harmonise regulations across sub-national jurisdictions and minimise responsibility overlaps could also reduce the cost of business investment, as well as promote spending on the housing stock. Indeed, a high degree of decentralisation of land-use decisions and responsibility overlaps are empirically associated with high rigidity of housing supply (Bétin and Ziemann, 2019).

As discussed earlier, overly strict rental market regulations have inhibited housing investment in some countries. Regulations such as rent controls and landlord-tenant rules can provide protections for renters but may also reduce incentives to invest in rental housing due to lower rental revenues and the greater difficulty of selling properties (Kholodilin and Kohl, 2020). For instance, rent controls in San Francisco are estimated to have reduced housing supply by as much as 15% (Diamond, McQuade and Qian, 2019). OECD work has found that the house price elasticity of residential construction is considerably lower where there is stringent rental market regulation (Cavalleri, Cournède and Özsöğüt, 2019).

Minimising regulatory barriers to foreign direct investment (FDI) can help facilitate the best allocation of global investment and enhance competition. Capital spending may increase in both source and destination countries when vertical FDI is involved, leading to the buildup of global value chains. Nonetheless, as measured by the OECD FDI regulatory restrictiveness index, policy restrictions on inward FDI are high in some economies, especially in emerging-market economies (Figure 2.23). This may have contributed to the modest FDI inflows observed in recent years (Figure 2.14, Panel B). A renewed drive to ease or eliminate FDI policy barriers could support such inflows and capital spending in destination countries. According to the country-specific recommendations in Chapter 3, such a policy approach may be particularly relevant in Costa Rica, Indonesia, the Philippines and Viet Nam, as well as in some advanced economies such as Korea, New Zealand and Switzerland.

Figure ‎2.23. Restrictions on FDI are particularly pronounced in some emerging-market economies

OECD FDI Restrictiveness Index – Scores, 2023

Source: OECD FDI Restrictiveness Index database.

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Policies that reduce financing frictions for intangible investment can alleviate the need for firms to retain cash resources to self-finance future intangible investment projects. It may also help enable young and small firms to undertake investment projects, promoting competitive pressures in more concentrated markets. Financial frictions can be especially acute in bank-based financial systems for firms without traditional forms of collateral. Such firms include those with a high proportion of knowledge-based assets and start-ups with limited credit history. Improving the depth of capital markets would support a more diverse range of funding options and promote competition between lenders, thus improving access to finance for new firm entrants and intangible investments. In Europe, making further progress on implementing the Savings and Investments Union will be important in this regard. Reforms that improve access to credit are also relevant in emerging-market economies including Brazil and India (Chapter 3).

Developing certain segments of capital markets may require some public financial support and regulatory actions, provided they do not endanger financial stability. Possible examples include adjusting regulatory restrictions on the investment activities of pension providers, reducing administrative requirements on fintech lenders and equity crowdfunding platforms, reforms that enable “open finance”, and public investment in venture capital markets. The latter may be particularly well-suited to funding investments by innovative firms with non-standard risk profiles (Calvino, Criscuolo and Menon, 2015). Government involvement in venture capital deals has been particularly notable in Hungary but has also played a role in many other European economies (Figure 2.24). There can be synergies between promoting venture capital and efforts undertaken in some countries to develop specific public equity markets for smaller and innovative firms (for example, KOSDAQ in Korea, Mothers Exchange in Japan and SME growth markets in the European Union). These exchanges typically have simplified listing and disclosure requirements and can provide an appealing exit option for venture capital investors once successful firms expand (Carvajal and Dider, 2024). Further developing market-based finance could also ease access to finance in emerging-market economies but would often benefit from complementary reforms that promote macro-financial stability and access to digital financial technologies (Banerjee, Mehrotra and Zampolli, 2024).

Figure ‎2.24. Government involvement in venture capital deals varies greatly across countries

Share of government venture capital deals, 2020-2022

Note: Government venture capital deals expressed as a share of total venture capital deals for OECD Member countries for the period 2000-2022. Standalone Government VC are deals where only GovVC investors participate, Mixed VC are co-investment funds where both government and private VC investors take part. The Government VC investment for Israel includes investments made in Israeli companies by TDJ Pitango Ventures (a Polish GovVC entity).

Source: Berger, Dechezleprêtre and Fadic, 2024.

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The availability of workers with skills that match business needs can both encourage capital investment and maximise its productivity payoff. This can be aided by structural reforms that lower frictions in the labour market, such as reducing the prevalence of unnecessary non-compete clauses (Andrews and Garnero, 2025). Developing a workforce with skills that evolve with underlying structural changes in the economy can also be an important enabling factor for new capital investment, as skills demands are evolving rapidly with population ageing, the digital and green transitions (OECD, 2024a). More broadly, recent OECD estimates suggest that around one-sixth of the productivity slowdown in OECD countries since the mid-2000s can be accounted for by a weakening in human capital accumulation (Andrews et al., 2024). A key need is for effective government efforts to promote investment in lifelong learning. Policy reform priorities include ensuring strong foundational skills that form the basis for further learning, the availability of high-quality adult training programmes, and encouraging participation in education by adapting programs and qualification requirements, including for those currently in the workforce.

High-quality public investment is needed in priority areas

Public capital spending can play a key role in supporting aggregate investment, especially when economies are operating at less than full capacity. Where fiscal space allows, public investment can provide an immediate boost to economic activity by stimulating demand and employment, particularly in sectors with strong multiplier effects (Mourougane et al., 2016). In the longer term, high-quality public investment can crowd‑in private investment, foster innovation, and raise human capital (Box 2.2), thereby boosting potential output growth.

However, public investment can also crowd out private spending—especially in contexts where it increases borrowing costs for firms, either by heightening concerns over debt sustainability, or if it substitutes private investment rather than complements it. Anchoring public investment within a credible medium-term budgetary framework can enhance policy predictability, support prioritisation and sequencing, and strengthen fiscal sustainability (OECD, 2019). Robust public investment management frameworks are essential to ensure the efficiency of public capital spending and its complementarity with private investment. Close coordination with subnational governments is often required, particularly for infrastructure projects with regional development objectives.

Box ‎2.2. Government investment and growth-enhancing structural outcomes

What is the role of public investment in building human capital and fostering innovation? As governments aim to strengthen long-term growth and resilience – particularly in a context of constrained fiscal space – it is crucial that public spending is effectively targeted to areas that yield the greatest returns.

This box examines the growth-enhancing effects of government investment in three key areas: research and development (R&D), education, and health. OECD work has long highlighted the importance of investment in these areas for raising potential output growth (Fournier and Johansson, 2016). Public R&D contributes to the economy’s knowledge base and can catalyse private sector innovation. Investment in education strengthens human capital by improving workforce skills, while spending on health supports a productive workforce.1

Figure ‎2.25. Government investment can have clear benefits for long-term growth

Note: Cumulative impulse responses of a shock to government investment on a productivity channel. The dependent variable is in log differences, multiplied by 100, hence the impulse response functions can be interpreted as cumulative growth rates. The set of controls includes lags of the dependent variable, GDP per capita, GDP growth, the output gap and the fiscal balance (all lagged). Regressions include country and time fixed effects and are estimated with OLS. Confidence bands are shown at the 90% and 68% levels.

Source: OECD calculations.

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To quantify the effects of government investment on key growth channels, a framework developed in recent literature on public debt is applied.2 Historical ‘spending surges’ – defined as increases of at least 10% and lasting three years or more – are identified in a panel of OECD countries from 1970 to 2019. This surge‑based approach mitigates measurement challenges in fiscal data and improves identification by focusing on large, discrete shifts in spending more likely to be related to policy decisions. The dynamic effects of these surges on structural outcome variables closely linked to long‑run growth are estimated using the local projection method (Jordà, 2005).

The results suggest that spending surges are associated with meaningful improvements in growth‑related outcomes. A sustained increase in government R&D spending increases private R&D expenditure by approximately 6% on average, 5 years after the shock (Figure 2.25). Surges in education spending are associated with a 2½ per cent rise in educational attainment, while increases in health spending reduce infant mortality by 2½ per cent.3 These effects tend to emerge gradually, underscoring the long-term nature of returns to public investment in these areas.

 

1. A broad definition of investment is used—covering physical capital and current spending—to reflect that operational expenditures (e.g. salaries of scientists, teachers, and doctors, as well as lab, classroom, and hospital resources) directly contribute to innovation and human capital formation.

2. Based on the forthcoming OECD Working Paper: ‘Government Spending and Growth Enhancing Structural Outcomes.’

3. Infant mortality is used in the regressions since it is less subject to influence from confounding factors, but it is strongly correlated with other measures of mortality and life expectancy.

Public investment can help enable the green and digital transitions, potentially crowding-in private investment. There remain significant investment needs in response to climate change. Global financing needs for climate mitigation are estimated at USD 5 trillion a year until 2030 (IMF, 2023). Investment needs for adaptation are also estimated to be large, though lower than for mitigation. Country‑specific policy recommendations for increased climate-related public investment are highlighted in Chapter 3 for many advanced economies, as well as Malaysia. To complement public spending, other policy instruments – including pricing of climate-related externalities, information provision and regulations – can help more closely align private incentives with social benefits for climate mitigation and adaptation activities. Targeted public investment in basic research, through grants or publicly conducted R&D, can also catalyse private innovation in fields such as clean energy and climate technologies. Similarly, public investment can help support and encourage private investment in digital infrastructure. Efficient, reliable, and widely accessible digital infrastructure is essential to unlocking the full economic benefits of digitalisation, and public investment is often needed to extend coverage to rural areas or finance costly infrastructure projects with high positive externalities.

Tax policy reforms can promote stronger private investment growth

Tax policy settings also influence the conditions for private investment. While the recent decline in the user cost of capital has not been accompanied by strong aggregate investment growth in many economies, certain tax policy changes may be effective in incentivising investment spending. Low corporate tax rates on a broad corporate tax base can support investment by limiting the complexity of the tax system for businesses and distortions between different kinds of taxpayers. However, targeted measures such as relatively generous capital allowances or reduced non-profit taxes may be a more cost-effective way to support investment spending than general reductions in the statutory corporate tax rate (Box 2.3). Carefully designed tax incentives can also help address market failures in areas such as R&D spending and clean technology adoption (González Cabral et al., 2023; Dressler and Warwick, 2025). Temporary tax breaks, such as a short-lived acceleration in depreciation deductions, can also have powerful effects by advancing capital spending (Eichfelder and Scheider, 2014). However, such measures can be associated with deadweight costs and lower spending after the tax measure expires. In general, tax incentives may also be less effective in raising investment among firms with minimal profits (for example, small firms and start-ups), where these incentives do not have provisions, such as allowing firms to carry‑forward tax benefits, or tax credits to be refunded for firms without a tax liability.

Tax measures that favour the accumulation of debt over equity can have negative consequences for financial stability by incentivising excessive debt accumulation and can have adverse implications for investment activity (Égert, 2021; Blundell-Wignall and Roulet, 2013). Incentives to favour debt financing may also inhibit the funding of intangible investments given that the underlying characteristics of these assets (uncertain returns, non-rivalry and low redeploy ability; Demmou and Franco, 2021) pose challenges in providing them as collateral against loans. However, this effect may be offset somewhat in tax systems that allow expensing of intangible investments.

Box ‎2.3. Corporate income taxation and investment: impact and policy design considerations

Corporate income taxation (CIT) is usually considered to be a key policy instrument for influencing business investment decisions. Since the seminal work of Hall and Jorgenson (1967), a large body of empirical research has found a negative relationship between CIT rates and investment (see e.g. Feld and Heckemeyer, 2011; Vartia, 2008; Schwellnus and Arnold 2008; Zwick and Mahon, 2017). Higher CIT rates reduce the after-tax returns on investment, thereby reducing the number of economically viable investment projects. Higher CIT rates also can negatively affect firms' cash flow, which reduces liquidity and can limit investment for firms facing financial constraints.

The overall effect of CIT on investment also depends on the design of the CIT system beyond headline rates, including depreciation rules, tax allowances (such as accelerated depreciation), tax credits, CIT exemptions and reduced tax rates. Forward-looking effective tax rates, calculated based on hypothetical investment projects, can help gauge the impact of different design features of the tax system over the lifetime of an investment (Devereux and Griffith, 2003; Hanappi, 2018; González Cabral, Appelt and Hanappi, 2021; Celani, Dressler and Hanappi, 2022). The effective average tax rate (EATR) measures the average tax rate on investment projects earning positive profits or economic rents, while the effective marginal tax rate (EMTR) reflects the tax burden on a marginal investment project that just breaks even. Figure 2.26 also shows that these rates vary across sources of finance (and they can also vary according to asset classes, project profitability and firm size), highlighting the distortions in many CIT systems.

Figure ‎2.26. Effective corporate income tax rates vary strongly across assets and source of finance

Distribution of statutory versus effective CIT rates across OECD countries, percentage of taxable income, 2023

Note: The distribution (minimum, maximum, median and interquartile range) of CIT rates across OECD countries. It compares statutory tax rates with synthetic tax policy indicators calculated on the basis of a prospective, hypothetical investment project. Unlike backward-looking effective tax rates, they do not incorporate any information about firms' actual tax payments. Further details of the model and assumptions are contained in OECD Corporate Tax Statistics and Hanappi (2018).

Source: OECD Corporate Tax Statistics 2024 (OECD, 2024c).

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The impact of corporate taxation on investment: heterogeneity across firms and tax design

Recent research suggests that the potential for corporate tax policy to support business investment varies across firms. Large, profitable multinationals — especially those with significant intangible assets, market power or profit-shifting opportunities — have become less sensitive to corporate tax changes in a single country over time, particularly since the global financial crisis (Hanappi and Whyman, 2023; Hanappi, Millot and Turban, 2023; Zwick and Mahon, 2017). Since a small number of large multinational firms account for a substantial share of total investment, this may reduce the aggregate investment response to tax policy changes.

Moreover, evidence suggests that investment responses vary significantly depending on tax policy design. Increases in effective taxation through non-profit taxes (i.e. business taxes levied on bases other than corporate income, such as real estate or wealth) tend to have a stronger negative effect on investment than CIT. Reforms that affect the tax base, such as expanding capital allowances, can be more effective in supporting investment compared to statutory tax rate (STR) cuts (Hanappi, Millot and Turban, 2023). Studies indeed show increased investment in response to the provision of accelerated depreciation, immediate expensing, enhanced allowances and tax credits (Maffini, Xing and Devereux, 2019; Chodorow-Reich et al., 2024; Ohrn, 2019). However, care should be taken when using these allowances, as a CIT base that is too narrow can undermine revenue and introduce distortions. Reducing the debt bias in the CIT system can also reduce economic distortions and support financial stability (De Mooij and Hebous, 2018; Feld, Heckemeyer and Overesch, 2013).

Alongside tax design, tax certainty is an essential condition for fostering business investment. Stable and predictable tax rules, combined with clear dispute resolution mechanisms, can reduce investment risk and support economic growth. In an increasingly globalised tax environment, both national policy choices and international cooperation can play a critical role in ensuring certainty.

Enhancing the investment impact of CIT policy: potential options for reform

Careful CIT design can enhance investment outcomes. Reforms could include:

• Eliminating or reducing non-profit taxes, which tend to distort investment more than profit-based taxes.

• Prioritise the use of more generous capital allowances and other tax-base measures, which often lead to stronger investment responses.

• Limit tax incentives to areas with clear policy goals and strong governance arrangements, and where clear positive externalities warrant an incentive, such as for R&D or green investments.

• Focus on expenditure-based tax incentives over income-based incentives. Support tax certainty through clear and predictable tax rules, clear eligibility criteria for tax incentives, and collaborative and consistent approach to tax administration, including internationally (OECD, 2024d).

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Annex 2.A. An investment accelerator model

To help assess the extent to which cyclical fluctuations have contributed to the observed dynamics in business investment since the global financial crisis (GFC) and the pandemic, a reduced-form investment model is estimated. This relates real business investment growth to its own lag as well as to current real output growth. The model is estimated for the 17 OECD countries for which data on real business investment are available. This empirical framework aims to capture the short-term response of investment to output fluctuations, shedding light on the role of demand-side factors in shaping investment patterns over recent cycles. The results are presented in Table 2.A.1.

Annex Table ‎2.A.1. Panel regression results for simple accelerator model

Dependent variable: Annual real business investment growth

	(1)
Δ Output	1.2646***
	(0.179)
Δ Investment (t-1)	0.6065***
	(0.039)
Country FE Observations R-squared	Yes 1824 0.616

Note: Variables are real business investment and real GDP. The model is estimated on quarterly data from 1980Q1 to 2008Q2 for 17 OECD countries (Australia, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Japan, Korea, Netherlands, Norway, New Zealand, Sweden, Switzerland, United Kingdom, United States).

Source: OECD Economic Outlook 117 database; and OECD calculations.

An extended model is subsequently estimated that incorporates the standard determinants of investment implied by neo-classical frameworks, while also allowing for the role of time-varying capital depreciation rates, real equity prices (which may reflect corporate balance sheet conditions and elements of Tobin’s Q), and capacity utilisation, proxied by the output gap (with a prior that a more negative output gap reduces the need to undertake new investment). The model is estimated using an unbalanced panel comprising 13 OECD economies, with quarterly data from 1993Q1 to 2022Q3, subject to data availability. All variables enter the model in logarithmic form, except for the output gap. In line with Pelgrin et al. (2002), the user cost of capital is introduced as log(1+UCC). Country-specific effects are controlled for using a least squares dummy variable estimator. The estimation results are presented in Table 2.A.2.

Annex Table ‎2.A.2. Panel regression results for extended accelerator model

Dependent variable: Quarterly real business investment growth

	(1)
Δ Output	1.3966*** (0.112)
Δ UCC Gap (t-1) Δ Depreciation Share price (t-1) Investment (t-1) Output (t-1) UCC (t-1)	-0.3014 (0.218) 0.0038** (0.002) 0.3638* (0.196) 0.0292 (0.017) -0.3973* (0.187) 0.5055* (0.251) -0.1551 (0.153)
Country FE	Yes
Observations R-squared	1560 0.301

Note: Investment is real business fixed investment (log); Output is real GDP (log); Gap is output gap (in per cent); UCC is a proxy for the user cost of capital (product of the relative price of investment goods and the sum of real interest rate and depreciation rate; log(1+UCC)); Share price is equity price index deflated by GDP deflator (log). Robust standard errors are clustered by country.

Source: OECD Economic Outlook 117 database; and Authors’ calculations.

Notes

← 1.  Differences in the valuation of firms in advanced economies and their US counterparts may be driven by several factors. These include the traditionally stronger institutional framework in the United States —including corporate governance standards and financial market infrastructure—greater market capacity to absorb global risks, and higher expectations for future investment returns (La Porta et al., 1998). The relative undervaluation of “brown” firms (those with higher carbon emissions) in other developed countries, compared to the United States, may also contribute to this premium (Doidge, Karolyi and Stulz, 2020).

← 2.  Despite ongoing enhancements to the National Accounts, some types of intangible assets are still not captured in business investment statistics, such as organisational and marketing capital. Some attempts have been made to measure these newer types of intangibles, suggesting that around half of intangible investments are not captured in official national accounts (Corrado et al., 2021).

← 3.  The low cost of borrowing may also have incentivised firms to undertake non-investment financial activities such as leveraged buybacks and debt refinancing. See Chapter 2 of the Global Debt Report 2025, (OECD, 2025b).

← 4.  This measure is a proxy for actual markups (the ratio of price to marginal cost), since the cost of goods sold includes a share of fixed costs and may differ from marginal cost.

← 5.  In other instances, companies in industries facing major shortages may choose to automate parts of their production instead, leading to increased investment in tangible capital (Dorville, Filippucci and Marcolin, forthcoming).

← 6.  In some countries, housing investment growth prior to the GFC was excessive, with residential investment rising well above historical averages and exceeding 8% of GDP, including Spain and Ireland and reflected in surges in mortgage credit and household debt-to-GDP ratios.