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Profitability, Capacity and Uncertainty: A Model of UK Manufacturing Investment

Driver, Ciaran and Temple, Paul and Urga, Giovanni (2005) 'Profitability, Capacity and Uncertainty: A Model of UK Manufacturing Investment.' Oxford Economic Papers, 57 (1). pp. 120-141.

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Standard models fail to explain variation in UK capital investment. This paper develops and tests a new theory based on the insights of Edmond Malinvaud, in which investment under uncertainty is adjusted to balance the cost of excess and deficient capacity. Using quarterly UK manufacturing data on two capital assets (machinery and building) over a 30-year period, we obtain unique cointegrating relationships for the model, linking investment, profitability and capacity utilization. Non-nested testing shows that the estimated model performs similarly to a frequently used survey of investment intentions. Our model also addresses differences in the behaviour of the two asset classes; we show that building investment fell relative to machinery investment over the period, reflecting not only relative prices and profitability, but also long term influences such as technology or governance. At the macro level we find little role for any effects from taxation or financial constraints.

Item Type: Journal Article
SOAS Departments & Centres: Faculty of Law and Social Sciences > Department of Financial and Management Studies
DOI (Digital Object Identifier): 10.1093/oep/gpi001
Depositing User: Mutsa Marau
Date Deposited: 22 Oct 2010 11:00
URI: http://eprints.soas.ac.uk/id/eprint/10517

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