Understanding the weakness in business investment

Weak investment has weighed on potential output growth in advanced and emerging economies since the global financial crisis (GFC), despite historically low cost of capital and strong corporate profitability. This paper documents shortfalls in business investment across OECD countries and examines their drivers, drawing from national accounts and firm-level data. Real business investment is around 23% below trend relative to the GFC on a weighted average basis. Subdued aggregate demand and elevated uncertainty appear to explain around half of this shortfall, with the remainder likely linked to more structural factors. Notably, the most pronounced changes in the composition of investment have occurred across asset classes rather than industries, reflecting the shift toward a more digital and knowledge-based economy, with increased investment in software and data, ICT hardware, and R&D. Changes in corporate behaviour also appear to have been important—including increased cash holdings and persistently high required rates of return on investment, despite lower capital costs. Taken together, these trends lend support to explanations for investment weakness related to financing challenges for intangibles, increased corporate caution, weakening competitive pressures, and declining business dynamism.