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Investment Hollowing Out

IMF Economic Review volume 66, pages 5–30 (2018)Cite this article

Abstract

Investment in physical capital collapsed during the Great Recession, and while growth subsequently resumed, the capital stock remains below trend (Hall in Quantifying the lasting harm to the US economy from the financial crisis, NBER Macroeconomics Annual, Bureau of Economic Research, 2014). We explore firm-level data on investment and document that investment fell relative to fundamentals at the turn of the millennium—well before the Great Recession. This downturn in investment coincides with a shift in employment toward services and cognitive skills—the “polarization” described by Autor et al. (Am Econ Rev 96(2):189–194, 2006), as a possible consequence of off-shoring and automation. An analogous sorting of firms into industries shows a shift of investment toward spatially “grounded” industries, such as energy and telecommunications, from which capital cannot be relocated. Investment shifts away from production sectors, such as manufacturing, which can be relocated. While high-tech firms grow in number and value, this growth is associated with a flat share of capital investment. For these sectors, we document a shift toward intangible, rather than physical, capital. The “hollowing out” of investment, like labor, carves out manufacturing and production sectors, leaving grounded industries that are less susceptible to off-shoring and cognitively intensive industries that are growing in intangible, rather than fixed, capital.

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Fig. 1

Source: Bureau of Economic Analysis

Fig. 2
Fig. 3
Fig. 4

Source: Authors’ calculations from Compustat/CRSP data

Fig. 5

Source: Authors’ calculations from Compustat/CRSP data

Fig. 6

Source: Authors’ calculations from Compustat/CRSP data

Fig. 7

Source: Authors’ calculations from Compustat/CRSP data

Fig. 8

Source: Authors’ calculations from Compustat/CRSP data

Fig. 9

Source: Bureau of Economic Analysis capital flows data, authors’ calculations from Compustat data

Fig. 10

Source: Bureau of Economic Analysis

Fig. 11

Source: Authors’ calculations from Compustat/CRSP data

Fig. 12

Source: Authors’ calculations from Compustat/CRSP data

Fig. 13

Source: Authors’ calculations from Compustat data

Fig. 14

Source: Board of Governors of the Federal Reserve System (US), Nonfinancial corporate business; Bureau of Economic Analysis

Notes

  1. We normalize investment and cash flow by assets rather than physical capital for comparability with our later regressions where we examine broader measures of firms’ assets, including intangible capital. Using physical capital in the benchmark regressions does not substantively change the results.

  2. There are ten Fama–French industries, but since we exclude Finance, we report only nine of the ten.

  3. Nondurables, durables, and manufacturing as defined by Fama–French include manufacturing SIC codes (20 and 30s) plus Agriculture (01–10).

  4. The Fama–French Health category includes SIC codes for pharmaceuticals, medical instruments and devices, and health services.

  5. We did break out Health Services, but it made no difference to our results given its small size.

  6. Decker and others (2016). “Unraveling the Oil Conundrum: Productivity Improvements and Cost Declines in the US Shale Oil Industry.” Federal Reserve Board, FEDS Notes, March 22.

  7. Since the Global Financial Crisis in 2008–2009, the growth of global trade relative to global GDP has slowed. For a discussion of these trends, and the role of “global value changes see: IMF (2016), “Global Trade: What’s behind the Slowdown?,” International Monetary Fund, World Economic Outlook, Chapter 2, (October.); and Haugh and others (2016) “Cardiac Arrest or Dizzy Spell: Why is World Trade So Weak and What can Policy Do About It?” OECD Economic Policy Paper, No. 18 (September.)

  8. Nakamura (2008) discusses national income accounting issues associated with intangible investment.

  9. For a discussion of these issues see: Aizcorbe and others (2008), and Corrado and others (2005). Bolton and others (2017) model a setting in which the cost of intangibles would be incurred over time, resulting in measurement issues of the type we describe.

  10. See Gruber and Kamin (2015). “The Corporate Saving Glut in the Aftermath of the Global Financial Crisis,” Federal Reserve Board, International Finance Discussion Papers 1150.

  11. See IMF (2015), “Private Investment: What’s The Holdup?,” International Monetary Fund, World Economic Outlook, Chapter 2, (April).

  12. See, for example, Lukasz and Smith (2015) “Secular Drivers of the Global Real Interest Rates,” Bank of England Staff Working Paper No. 571.

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Author information

Authors and Affiliations

  1. Nomura Securities International, New York, NY, USA

    Lewis Alexander

  2. Northwestern University, Evanston, IL, USA

    Janice Eberly

  3. National Bureau of Economic Research, Cambridge, MA, USA

    Janice Eberly

Authors
  1. Lewis Alexander
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  2. Janice Eberly
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Corresponding author

Correspondence to Janice Eberly.

Additional information

Janice Eberly: Prepared for the Seventeenth Annual Jacques Polak Research Conference at the IMF, November 2016. We are grateful to Qiushi Huang for outstanding research assistance and to our discussant Ricardo Caballero, Olivier Blanchard, Thomas Philippon and conference participants for helpful comments.

Appendices

Appendix 1: Data

We use a panel of Compustat firms with annual data for the period 1975–2015. The sample includes 5434 firms and 50984 firm-year observations. Nominal values are adjusted using the implicit price deflator for nonresidential investment for investment and capital variables and the GDP deflator for the remaining variables, such as cash flow and asset values.

1.1 Description of Variables

  1. 1.

    Cash Flow CF: Income Before Extraordinary data (IB, data 384) + Depreciation and Amortization (DP, data 236).

  2. 2.

    Market Value: closing stock price times number of common shares outstanding (end of period) plus redemption value of preferred stock (end of period) = prc * shrout/1000 + PSTKRV (data 677)

  3. 3.

    Capital K: PPEGT data 650.

  4. 4.

    Long-term Debt: dltt data230

  5. 5.

    Tobin’s Q: \(\frac{{{ MarketValue}}_{t}+{{ dltt}}-{{ INVT}}}{K_{t}}\)

  6. 6.

    Intangibles: Intan data 401

  7. 7.

    Investment I: CAPXV data 123

  8. 8.

    R&D: XRD data 971

  9. 9.

    Inventory: INVT data 423

  10. 10.

    Employee: EMP: data 290

  11. 11.

    Account Receivables: ARTFS data 91

  12. 12.

    Total Asset: AT data 94

  13. 13.

    DLRSN: Research Company Reason for Deletion. “01” implies M&A, which will be excluded from the sample.

1.2 Sample Selection

Starting from the CRSP/Compustat Merged database, the following filters were applied:

  1. 1.

    IB (data 384) or DP (data 236) missing

  2. 2.

    Tobin’s Q: \(q_{t}<0\) (or missing)

  3. 3.

    \({{ intan}}<0\) (or missing)

  4. 4.

    Investment missing

  5. 5.

    DLRSN = 01: M&A are excluded.

  6. 6.

    Debt missing

  7. 7.

    Tobin’s Q \(>15\)

  8. 8.

    The following firms are excluded: Financial firms(\(6000\Leftarrow SIC\Leftarrow 6999\)), regulated Utilities ( \(4900\Leftarrow {{ SIC}}\Leftarrow 4999\)) as well as firms being described as public service, international affairs, or nonoperating establishments (\(SIC\Rightarrow 9000\))

Appendix 2: Industry Classifications

We use the Fama–French 10 industry classifications for SIC codes. The list below provides the ten Fama–French categories and associated four-digit SIC codes.

  • 1 NoDur Consumer NonDurables—Food, Tobacco, Textiles, Apparel, Leather, Toys

  • 0100-0999

  • 2000-2399

  • 2700-2749

  • 2770-2799

  • 3100-3199

  • 3940-3989

  • 2 Durbl consumer durables—cars, TV’s, furniture, household appliances

  • 2500-2519

  • 2590-2599

  • 3630-3659

  • 3710-3711

  • 3714-3714

  • 3716-3716

  • 3750-3751

  • 3792-3792

  • 3900-3939

  • 3990-3999

  • 3 Manuf manufacturing—machinery, trucks, planes, chemicals, off furn, paper, com printing

  • 2520-2589

  • 2600-2699

  • 2750-2769

  • 2800-2829

  • 2840-2899

  • 3000-3099

  • 3200-3569

  • 3580-3629

  • 3700-3709

  • 3712-3713

  • 3715-3715

  • 3717-3749

  • 3752-3791

  • 3793-3799

  • 3830-3839

  • 3860-3899

  • 4 Energy oil, gas, and coal extraction and products

  • 1200-1399

  • 2900-2999

  • 5 HiTec business equipment—computers, software, and electronic equipment

  • 3570-3579

  • 3622-3622 Industrial controls

  • 3660-3692

  • 3694-3699

  • 3810-3839

  • 7370-7372 Services—computer programming and data processing

  • 7373-7373 Computer integrated systems design

  • 7374-7374 Services—computer processing, data prep

  • 7375-7375 Services—information retrieval services

  • 7376-7376 Services—computer facilities management service

  • 7377-7377 Services—computer rental and leasing

  • 7378-7378 Services—computer maintanence and repair

  • 7379-7379 Services—computer-related services

  • 7391-7391 Services—R&D labs

  • 8730-8734 Services—research, development, testing labs

  • 6 Telcm telephone and television transmission

  • 4800-4899

  • 7 Shops wholesale, retail, and some services (laundries, repair shops)

  • 5000-5999

  • 7200-7299

  • 7600-7699

  • 8 Hlth healthcare, medical equipment, and drugs

  • 2830-2839

  • 3693-3693

  • 3840-3859

  • 8000-8099

  • 10 Other other—mines, constr, BldMt, trans, hotels, bus serv, entertainment, (excluding finance)

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Alexander, L., Eberly, J. Investment Hollowing Out. IMF Econ Rev 66, 5–30 (2018). https://doi.org/10.1057/s41308-017-0044-2

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