This paper compares pooled models of capital investment with non-pooled models using the UK's Con... more This paper compares pooled models of capital investment with non-pooled models using the UK's Confederation of British Industry's (CBI) Industrial Trends Survey for the U.K., particularly focusing on the effect of uncertainty on investment. The uncertainty measure is based on the cross sectional dispersion of expectations. The panel data estimation shows that uncertainty has negative effects, which are nonnegligible in terms of magnitude, on investment. However, if we look at the estimation results at the industry level, we find a great diversity in elasticity and t-statistics, providing valuable information not available from the pooled model. Finally, we compare forecast performances based on the above models. It is confirmed that pooled estimators are generally better than non-pooled estimators in terms of forecast performance, but the difference between the two is not very large.
Economic theory suggests several plausible reasons why firms may employ hurdle rates for capital ... more Economic theory suggests several plausible reasons why firms may employ hurdle rates for capital investment appraisal that differ from discount rates. Using a sample of business units from the PIMS data bank of North American companies we find that hurdle rates are frequently ...
This paper presents an empirical study of the various channels of influence from uncertainty to f... more This paper presents an empirical study of the various channels of influence from uncertainty to fixed investment using long run data from the Confederation of British Industry (CBI) Industrial Trends Survey. Based on data from over 40 UK manufacturing sectors, the paper estimates the impact of uncertainty on investment using the seemingly unrelated regressions estimator (SURE) at industry level. Considerable industrial heterogeneity is uncovered and a major focus of the paper is to explain this variation. The cross-industry pattern of results is checked for consistency with the pattern predicted by the various channels of influence from uncertainty to investment. A specially constructed data set of industrial characteristics is used to discriminate between the competing hypotheses. It is found that sunk costs are an important predictor of the negative coefficients on the uncertainty term. There is some evidence for both the importance of options to delay and options to expand. We fi...
This paper uses direct evidence from reported hurdle rates and discount rates to assess theories ... more This paper uses direct evidence from reported hurdle rates and discount rates to assess theories of corporate investment appraisal. We find first that hurdle rates are frequently below discount rates, suggesting strategic or managerial behaviour. To test this we use probit analysis to discriminate between this group and an alternative group, where hurdle rates are higher than discount rates. We find that variables representing the opportunity for managerial or strategic investment (e.g. free cash flow) or the motivation (e.g. low growth) increase the probability of firms having hurdle rates below discount rates. In a second stage of the analysis we analyse the relationship between hurdle rates and discount rates for both sets of firms separately. For example, we find that for the strategist firms, product R&D tends to be associated with a lower hurdle rate relative to the discount rate, while for the profit maximising group of firms, the opposite is the case. For the second sample, ...
The paper investigates the link between standards, business strategy and innovation, based upon a... more The paper investigates the link between standards, business strategy and innovation, based upon a factor analysis of the stated ‘context’ for innovation contained in the 2012-2014 UK Innovation Survey (UKIS). The analysis reveals a distinction between pro-active ‘entrepreneurial’ strategies and reactive and ‘defensive’ strategies, as well as firms, although regarded in the survey as innovation ‘active’ have no clear innovation based objective. We combine this classification with sectoral indicators of the significance of standards to investigate how firms deliver these strategies. We find that, in addition to the important role played by the type of innovation strategy, standards have a significant impact not only on the extensive margin of R&D expenditures, but also on the likelihood that firms will invest in related complementary investments, notably in training and design. We test these propositions with a specific UKIS question on the value that firms put on standards. The posit...
This paper considers the model of voluntary, consensus based standardization as developed through... more This paper considers the model of voluntary, consensus based standardization as developed through the British Standards Institution (BSI) and its contribution to learning and productivity growth. It discusses the contribution of professional engineers to the model's introduction, its extension at home and imitation overseas, arguing that by 1931 the BSI catalogue of standards represented a considerable stock of codified knowledge whose growth reflected underlying aggregate technological advance. To validate this claim we incorporate a measure of the BSI catalogue of standards into an econometric model of productivity growth in Britain. However, caution is required in the interpretation of this finding.
The economic constraint that has preoccupied policymakers in recent decades has been that of wage... more The economic constraint that has preoccupied policymakers in recent decades has been that of wage and price inflation. The policy response — structural reform of labour markets and monetary policy rules — is credited with giving rise to the ‘great moderation’, a reduced volatility of output and price inflation. The success of this approach was accepted by many until the great financial crash, though not everyone was entirely sure. As the head of the US Federal Reserve explained (Bernanke 2004): ‘if the Great Moderation was largely the result of good luck rather than a more stable economy or better policies, then we have no particular reason to expect the relatively benign economic environment of the past twenty years to continue’. Just so — looking back, good luck, including the effects of cheap imports from China and elsewhere, does seem a strong contender, but even without such retrospective vision, the great moderation needed to be questioned; success in reducing volatility and inflation was bought at the expense of a falling labour share, more severe recessions and increased inequality which implies new problems.
The lack of concern for capital investment among UK policymakers is to some extent puzzling becau... more The lack of concern for capital investment among UK policymakers is to some extent puzzling because, as noted in Chapter 2, it provided a mainstay of economic beliefs up to the 1980s, and remains important for growth theory. What exactly are many economists objecting to when they criticize the ‘exaggerated belief in the importance of promoting investment’ (Crafts 1991, p.89)? At one level the argument is hard to follow because there is a clear correlation between investment and other inputs that are indeed thought to be important. According to Crafts himself, any long-run success of 1980s policies was limited, because of the neglect of training and technology solutions ‘for which the present (Conservative) government has a distaste’ (p.95). But saying this, while dismissing the importance of capital investment, requires a convoluted argument. What does promoting investment mean if not associated acceleration in technology and training? Are firms likely to invest in irreversible expensive equipment without ensuring that it can be well used? Is not one of the obstacles to such investment that workers can be poached after training? And what is technology but a broad form of irreversible investment? The correlations between forms of investment are high. For example, the correlation between training and machinery equipment and software is 0.39 for manufacturing and 0.58 for services (Bulli 2008, Tables 3 and 4).
In Chapter 4 we highlighted the potential for market failure in allocating fixed capital, one rea... more In Chapter 4 we highlighted the potential for market failure in allocating fixed capital, one reason being the difficulty of investment decision-making under uncertainty. That argument in itself may not be enough to convince doubters of the case for a negative bias to capital investment. It may for example reasonably be claimed that the ‘animal spirits’ that replace conscious calculation may result as much in irrational exuberance and over-investment as in cautious inactivity. Arguments concerning spillover effects, while in our view powerful and persuasive, have also failed to fully convince because the emphasis in that literature tends to be on disembodied spillovers. A third argument relating to financial constraints has found more acceptance, but we have not emphasized it here because it is a complicated story that relates to the design of corporate governance as we discuss later in Chapter 6.
This paper considers the sources of technological change and productivity growth in the small fir... more This paper considers the sources of technological change and productivity growth in the small firm sector of UK manufacturing over the period 1973- 2002, focusing on the mechanisms by which spillovers occur between the large firms which perform the bulk of R&D and smaller firms which are the recipients. It is argued that the current volume of domestic R&D generates profitable and high productivity opportunities for smaller firms. However this mechanism ignores the ways in which R&D also contributes to the more general knowledge base available to small firms as codified information which frequently takes the measurable form of industrial standards. A simple model of labour demand among small manufacturing is developed which employs two measures of technological activity intended to capture both these channels. A co-integrating relationship based upon an augmented labour demand equation is established for UK manufacturing, showing the relevance of both channels for the explanation of ...
BRITAIN'S ECONOMIC PERFORMANCE Second edition The new and substantially revised edition of B... more BRITAIN'S ECONOMIC PERFORMANCE Second edition The new and substantially revised edition of Britain's Economic Performance provides a unique assessment of the current state of the supply side of the economy and will prove essential reading for all who take the ...
This paper considers the contribution of voluntary consensus based standards, as developed throug... more This paper considers the contribution of voluntary consensus based standards, as developed through the British Standards Institution (BSI), to collective learning and productivity growth in Britain. It discusses the pivotal contribution of professional engineers to the establishment of a committee based national standards setting body that developed an important model of consensus standardization. This model was imitated into new areas at home and overseas. We argue that by 1931 the catalogue of BSI standards represented a considerable stock of codified knowledge whose growth reflected that of underlying aggregate technological advance. This claim is validated by its successful incorporation into an econometric model that suggests that this mode of standardisation has made a significant contribution to productivity growth in Britain.
ABSTRACT This paper uses direct evidence from reported hurdle rates and discount rates to assess ... more ABSTRACT This paper uses direct evidence from reported hurdle rates and discount rates to assess theories of corporate investment appraisal. We find first that hurdle rates are frequently below discount rates, suggesting strategic or managerial behaviour. To test this we use probit analysis to discriminate between this group and an alternative group, where hurdle rates are higher than discount rates. We find that variables representing the opportunity for managerial or strategic investment (e.g. free cash flow) or the motivation (e.g. low growth) increase the probability of firms having hurdle rates below discount rates. In a second stage of the analysis we analyse the relationship between hurdle rates and discount rates for both sets of firms separately. For example, we find that for the strategist firms, product R&D tends to be associated with a lower hurdle rate relative to the discount rate, while for the profit maximising group of firms, the opposite is the case. For the second sample, we also find that risk variables raise the hurdle and that there is some evidence for an irreversibility effect. Responses of the hurdle rate to entry also differ between the two groups.
This review has been commissioned as part of the UK Government's Foresight Future of Manufacturin... more This review has been commissioned as part of the UK Government's Foresight Future of Manufacturing Project. The views expressed do not represent policy of any government or organisation.
This paper reports estimation of investment equations for two classes of fixed assets: plant & ma... more This paper reports estimation of investment equations for two classes of fixed assets: plant & machinery and building for a large sample of UK manufacturing industries. It exploits the different degree of irreversibility that characterises these assets to test the power of real options theory to explain investment under uncertainty. Additionally, the paper uses a specially constructed industry-specific measure of irreversibility for plant and machinery investment to test for real options effects within that class of investment.
During the 1980s Britain became one of the world's most market-oriented economies, an approac... more During the 1980s Britain became one of the world's most market-oriented economies, an approach which resulted in three severe recessions and a deepening degree of inequality. This book argues that a rebalancing of the economy will remain elusive until proactive policies are implemented at the corporate and industrial level.
Page 1. 1 THE PROFIT ORIENTATION OF UK MANUFACTURING INVESTMENT: Does Π beat Q? Ciaran Driver 1 I... more Page 1. 1 THE PROFIT ORIENTATION OF UK MANUFACTURING INVESTMENT: Does Π beat Q? Ciaran Driver 1 Imperial College Management School University of London SW7 2PG (UK) [email protected] ... 1998; Woods 1995; Chatelain 1998). ...
This paper presents an empirical study of the channels of influence from uncertainty to fixed inv... more This paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory. Using panel data from the Confederation of British Industry (CBI) Industrial Trends Survey, we report OLS estimates of the impact of uncertainty on investment where the regressors are augmented by cross-sectional averages of the dependent variable and of the individual specific regressors, as recently suggested by Pesaran (2004). The cross-industry pattern of results is checked for consistency with the pattern predicted by real options theory, using a specially constructed data set of industrial characteristics. We find that irreversibility is able to predict the pattern detected, but only when combined with a measure of the information advantage of delay. There is also evidence for expansion options effects; industries with high R&D and advertising intensities tend to have positive uncertainty effects.
This paper compares pooled models of capital investment with non-pooled models using the UK's Con... more This paper compares pooled models of capital investment with non-pooled models using the UK's Confederation of British Industry's (CBI) Industrial Trends Survey for the U.K., particularly focusing on the effect of uncertainty on investment. The uncertainty measure is based on the cross sectional dispersion of expectations. The panel data estimation shows that uncertainty has negative effects, which are nonnegligible in terms of magnitude, on investment. However, if we look at the estimation results at the industry level, we find a great diversity in elasticity and t-statistics, providing valuable information not available from the pooled model. Finally, we compare forecast performances based on the above models. It is confirmed that pooled estimators are generally better than non-pooled estimators in terms of forecast performance, but the difference between the two is not very large.
Economic theory suggests several plausible reasons why firms may employ hurdle rates for capital ... more Economic theory suggests several plausible reasons why firms may employ hurdle rates for capital investment appraisal that differ from discount rates. Using a sample of business units from the PIMS data bank of North American companies we find that hurdle rates are frequently ...
This paper presents an empirical study of the various channels of influence from uncertainty to f... more This paper presents an empirical study of the various channels of influence from uncertainty to fixed investment using long run data from the Confederation of British Industry (CBI) Industrial Trends Survey. Based on data from over 40 UK manufacturing sectors, the paper estimates the impact of uncertainty on investment using the seemingly unrelated regressions estimator (SURE) at industry level. Considerable industrial heterogeneity is uncovered and a major focus of the paper is to explain this variation. The cross-industry pattern of results is checked for consistency with the pattern predicted by the various channels of influence from uncertainty to investment. A specially constructed data set of industrial characteristics is used to discriminate between the competing hypotheses. It is found that sunk costs are an important predictor of the negative coefficients on the uncertainty term. There is some evidence for both the importance of options to delay and options to expand. We fi...
This paper uses direct evidence from reported hurdle rates and discount rates to assess theories ... more This paper uses direct evidence from reported hurdle rates and discount rates to assess theories of corporate investment appraisal. We find first that hurdle rates are frequently below discount rates, suggesting strategic or managerial behaviour. To test this we use probit analysis to discriminate between this group and an alternative group, where hurdle rates are higher than discount rates. We find that variables representing the opportunity for managerial or strategic investment (e.g. free cash flow) or the motivation (e.g. low growth) increase the probability of firms having hurdle rates below discount rates. In a second stage of the analysis we analyse the relationship between hurdle rates and discount rates for both sets of firms separately. For example, we find that for the strategist firms, product R&D tends to be associated with a lower hurdle rate relative to the discount rate, while for the profit maximising group of firms, the opposite is the case. For the second sample, ...
The paper investigates the link between standards, business strategy and innovation, based upon a... more The paper investigates the link between standards, business strategy and innovation, based upon a factor analysis of the stated ‘context’ for innovation contained in the 2012-2014 UK Innovation Survey (UKIS). The analysis reveals a distinction between pro-active ‘entrepreneurial’ strategies and reactive and ‘defensive’ strategies, as well as firms, although regarded in the survey as innovation ‘active’ have no clear innovation based objective. We combine this classification with sectoral indicators of the significance of standards to investigate how firms deliver these strategies. We find that, in addition to the important role played by the type of innovation strategy, standards have a significant impact not only on the extensive margin of R&D expenditures, but also on the likelihood that firms will invest in related complementary investments, notably in training and design. We test these propositions with a specific UKIS question on the value that firms put on standards. The posit...
This paper considers the model of voluntary, consensus based standardization as developed through... more This paper considers the model of voluntary, consensus based standardization as developed through the British Standards Institution (BSI) and its contribution to learning and productivity growth. It discusses the contribution of professional engineers to the model's introduction, its extension at home and imitation overseas, arguing that by 1931 the BSI catalogue of standards represented a considerable stock of codified knowledge whose growth reflected underlying aggregate technological advance. To validate this claim we incorporate a measure of the BSI catalogue of standards into an econometric model of productivity growth in Britain. However, caution is required in the interpretation of this finding.
The economic constraint that has preoccupied policymakers in recent decades has been that of wage... more The economic constraint that has preoccupied policymakers in recent decades has been that of wage and price inflation. The policy response — structural reform of labour markets and monetary policy rules — is credited with giving rise to the ‘great moderation’, a reduced volatility of output and price inflation. The success of this approach was accepted by many until the great financial crash, though not everyone was entirely sure. As the head of the US Federal Reserve explained (Bernanke 2004): ‘if the Great Moderation was largely the result of good luck rather than a more stable economy or better policies, then we have no particular reason to expect the relatively benign economic environment of the past twenty years to continue’. Just so — looking back, good luck, including the effects of cheap imports from China and elsewhere, does seem a strong contender, but even without such retrospective vision, the great moderation needed to be questioned; success in reducing volatility and inflation was bought at the expense of a falling labour share, more severe recessions and increased inequality which implies new problems.
The lack of concern for capital investment among UK policymakers is to some extent puzzling becau... more The lack of concern for capital investment among UK policymakers is to some extent puzzling because, as noted in Chapter 2, it provided a mainstay of economic beliefs up to the 1980s, and remains important for growth theory. What exactly are many economists objecting to when they criticize the ‘exaggerated belief in the importance of promoting investment’ (Crafts 1991, p.89)? At one level the argument is hard to follow because there is a clear correlation between investment and other inputs that are indeed thought to be important. According to Crafts himself, any long-run success of 1980s policies was limited, because of the neglect of training and technology solutions ‘for which the present (Conservative) government has a distaste’ (p.95). But saying this, while dismissing the importance of capital investment, requires a convoluted argument. What does promoting investment mean if not associated acceleration in technology and training? Are firms likely to invest in irreversible expensive equipment without ensuring that it can be well used? Is not one of the obstacles to such investment that workers can be poached after training? And what is technology but a broad form of irreversible investment? The correlations between forms of investment are high. For example, the correlation between training and machinery equipment and software is 0.39 for manufacturing and 0.58 for services (Bulli 2008, Tables 3 and 4).
In Chapter 4 we highlighted the potential for market failure in allocating fixed capital, one rea... more In Chapter 4 we highlighted the potential for market failure in allocating fixed capital, one reason being the difficulty of investment decision-making under uncertainty. That argument in itself may not be enough to convince doubters of the case for a negative bias to capital investment. It may for example reasonably be claimed that the ‘animal spirits’ that replace conscious calculation may result as much in irrational exuberance and over-investment as in cautious inactivity. Arguments concerning spillover effects, while in our view powerful and persuasive, have also failed to fully convince because the emphasis in that literature tends to be on disembodied spillovers. A third argument relating to financial constraints has found more acceptance, but we have not emphasized it here because it is a complicated story that relates to the design of corporate governance as we discuss later in Chapter 6.
This paper considers the sources of technological change and productivity growth in the small fir... more This paper considers the sources of technological change and productivity growth in the small firm sector of UK manufacturing over the period 1973- 2002, focusing on the mechanisms by which spillovers occur between the large firms which perform the bulk of R&D and smaller firms which are the recipients. It is argued that the current volume of domestic R&D generates profitable and high productivity opportunities for smaller firms. However this mechanism ignores the ways in which R&D also contributes to the more general knowledge base available to small firms as codified information which frequently takes the measurable form of industrial standards. A simple model of labour demand among small manufacturing is developed which employs two measures of technological activity intended to capture both these channels. A co-integrating relationship based upon an augmented labour demand equation is established for UK manufacturing, showing the relevance of both channels for the explanation of ...
BRITAIN'S ECONOMIC PERFORMANCE Second edition The new and substantially revised edition of B... more BRITAIN'S ECONOMIC PERFORMANCE Second edition The new and substantially revised edition of Britain's Economic Performance provides a unique assessment of the current state of the supply side of the economy and will prove essential reading for all who take the ...
This paper considers the contribution of voluntary consensus based standards, as developed throug... more This paper considers the contribution of voluntary consensus based standards, as developed through the British Standards Institution (BSI), to collective learning and productivity growth in Britain. It discusses the pivotal contribution of professional engineers to the establishment of a committee based national standards setting body that developed an important model of consensus standardization. This model was imitated into new areas at home and overseas. We argue that by 1931 the catalogue of BSI standards represented a considerable stock of codified knowledge whose growth reflected that of underlying aggregate technological advance. This claim is validated by its successful incorporation into an econometric model that suggests that this mode of standardisation has made a significant contribution to productivity growth in Britain.
ABSTRACT This paper uses direct evidence from reported hurdle rates and discount rates to assess ... more ABSTRACT This paper uses direct evidence from reported hurdle rates and discount rates to assess theories of corporate investment appraisal. We find first that hurdle rates are frequently below discount rates, suggesting strategic or managerial behaviour. To test this we use probit analysis to discriminate between this group and an alternative group, where hurdle rates are higher than discount rates. We find that variables representing the opportunity for managerial or strategic investment (e.g. free cash flow) or the motivation (e.g. low growth) increase the probability of firms having hurdle rates below discount rates. In a second stage of the analysis we analyse the relationship between hurdle rates and discount rates for both sets of firms separately. For example, we find that for the strategist firms, product R&D tends to be associated with a lower hurdle rate relative to the discount rate, while for the profit maximising group of firms, the opposite is the case. For the second sample, we also find that risk variables raise the hurdle and that there is some evidence for an irreversibility effect. Responses of the hurdle rate to entry also differ between the two groups.
This review has been commissioned as part of the UK Government's Foresight Future of Manufacturin... more This review has been commissioned as part of the UK Government's Foresight Future of Manufacturing Project. The views expressed do not represent policy of any government or organisation.
This paper reports estimation of investment equations for two classes of fixed assets: plant & ma... more This paper reports estimation of investment equations for two classes of fixed assets: plant & machinery and building for a large sample of UK manufacturing industries. It exploits the different degree of irreversibility that characterises these assets to test the power of real options theory to explain investment under uncertainty. Additionally, the paper uses a specially constructed industry-specific measure of irreversibility for plant and machinery investment to test for real options effects within that class of investment.
During the 1980s Britain became one of the world's most market-oriented economies, an approac... more During the 1980s Britain became one of the world's most market-oriented economies, an approach which resulted in three severe recessions and a deepening degree of inequality. This book argues that a rebalancing of the economy will remain elusive until proactive policies are implemented at the corporate and industrial level.
Page 1. 1 THE PROFIT ORIENTATION OF UK MANUFACTURING INVESTMENT: Does Π beat Q? Ciaran Driver 1 I... more Page 1. 1 THE PROFIT ORIENTATION OF UK MANUFACTURING INVESTMENT: Does Π beat Q? Ciaran Driver 1 Imperial College Management School University of London SW7 2PG (UK) [email protected] ... 1998; Woods 1995; Chatelain 1998). ...
This paper presents an empirical study of the channels of influence from uncertainty to fixed inv... more This paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory. Using panel data from the Confederation of British Industry (CBI) Industrial Trends Survey, we report OLS estimates of the impact of uncertainty on investment where the regressors are augmented by cross-sectional averages of the dependent variable and of the individual specific regressors, as recently suggested by Pesaran (2004). The cross-industry pattern of results is checked for consistency with the pattern predicted by real options theory, using a specially constructed data set of industrial characteristics. We find that irreversibility is able to predict the pattern detected, but only when combined with a measure of the information advantage of delay. There is also evidence for expansion options effects; industries with high R&D and advertising intensities tend to have positive uncertainty effects.
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