What happens after an investment spike - investment events and firm performance

Abstract

Our study aims at investigating the relationship between investment spikes andsubsequent productivity development at the firm level. We propose a novel identification scheme for the effects of an investment spike, using matching techniques andadequate econometric modelling. It allows us to find efficiency differentials againstmatched firms. We showed that TFP falls after an investment spike and slowly recovers thereafter, which is consistent with learning-by-doing effects. For smaller firmsthe fall is more pronounced and the subsequent recovery is longer. On the contrary, labor productivity rises after an investment spike, driven mainly by capital deepen-ing. The increase of sales after a spike suggests that expansion is the main purpose of an investment spike and rising employment confirms that this type of investmentis complementary to labor. As firms with spikes are on average more efficient andinvestment spikes attract resources and production factors, it suggests that improved allocative efficiency is an important factor driving positive macroeconomic correlation between investment and TFP.