Productivity and capital investment
The contribution of capital investment to variations in the rate of output growth between nations has been an important topic of research for many years, the argument being that the greater the investment in plant and equipment, the greater the capacity of the economy to grow (see Chapter 17).
Recent research has looked at the role of investment in tangible assets (plant, machinery and equipment) and in human capital (training, etc.) in influencing the growth of nations (Dougherty and Jorgenson 1997). Dougherty and Jorgenson found that for the period 1960-89, the two main factors explaining the recorded differences in levels of output per head between countries were identified as the level of capital input and the quality of labour input. They concluded that one of the most serious deficiencies in the UK vis-a-vis other countries was the low recorded level of capital per head.The later study by O’Mahony and de Boer (2002) provides further evidence on this issue of capital intensity, i.e. different levels of capital per unit of labour across nations and sectors. It indicated that, as compared to the UK, the capital available per hour worked was 25% higher in the US, 60% higher in France and 32% higher in Germany. The research also looked at three sectors, viz. manufacturing, distributive trades and financial/business services. It concluded that in each sector, the capital per hour worked was, on average across the three countries, some 46% above the UK level in manufacturing, 79% in the distributive trades and 99% in financial/ business services.
It has been argued from evidence such as this that the gap between the US and her competitors was partly due to much higher US investment in information and communications technology (ICT). The importance of investment in ICT on productivity growth can be seen in Table 1.9 (p.
13) where it is clear that the growth of ICT production contributed nearly twice as much (0.9%) to overall labour productivity growth in the US as compared to the UK (0.5%) or the EU (0.5%). The need for EU investment in this area is therefore clear.A relatively low level of capital intensity for the UK is of some concern in the context of studies such as that of Oulton (1997). In a more general survey of growth in 53 countries over the period 1965-90, Oulton found that the most important way of raising growth rates was by increasing the growth rate of capital stock, i.e. raising capital per worker. Of course, the relatively low levels of investment in the UK may be a rational response to low returns, so that whilst low investment may contribute to low productivity, low productivity may in turn discourage investment. For example, Oulton noted that the pretax rate of return for investment in UK companies (excluding North Sea oil) averaged only 8.7% per annum between 1988 and 1997, with the private rate of return on human capital around the same figure. Since the cost of capital averaged around 5-7% per annum over the same period, the payoff for investing in either physical or human capital in the UK was hardly attractive!
Finally, one should also not forget that investment in new infrastructure also contributes to productivity growth. For example, increased transport investment can lead to decreasing transport costs, allowing increased specialization and economies of scale (Venables 2007).