Staff Working Paper No. 992
By Sudipto Karmakar, Marko Melolinna and Philip Schnattinger
This paper studies the effects of different types of investment and levels of debt on productivity. We first examine the issue empirically using data on listed firms in the UK. Our main finding is that intangibles investments are a good proxy for productivity‑enhancing investment, as they have a positive effect on total factor productivity (TFP). On the other hand, we find no consistent evidence of positive TFP effects for tangible investment. In those firms that have high debt and high level of intangibles, the positive TFP effects are even more pronounced. Hence, debt can be ‘good’ if it is associated with productivity‑enhancing investments. We then set out a stylised model of a dynamic firm profit‑maximisation problem and augment it with an external financing option in a novel way. Uniquely, we use neural network methods to solve the value function of the model and propose a moments matching approach that allows us to estimate some of the parameters of the model. We use the model to illustrate how productivity‑enhancing investment differs from other investments in its effects on TFP, and how these positive effects can be stronger for firms that have higher indebtedness. Applying our model to aggregate TFP dynamics in the UK suggests that around a tenth of the TFP slowdown in the UK since the global financial crisis can be attributed to weaker intangibles investments..
This version was updated in February 2024.
What is productive investment? Insights from firm-level data for the United Kingdom
