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PKSG Working Paper Series

Working Paper PKWP1707

Financialisation and physical investment: a global race to the bottom in accumulation?

July 2017

Daniele Tori, Özlem Onaran

We estimate the effects of financialisation on physical investment in the developed and developing countries using panel data based on balance-sheets of publicly listed non-financial companies (NFCs) for the period 1995-2015. Among the developed economies, we focus on the cases of the USA, Japan, and a group of Western European countries. In the developing world, we present estimations based on the group of the NFCs in all developing countries as well as BRICS as a group- and country specific estimations for South Africa, South Korea, India, and China. We find robust evidence of an adverse effect of both financial payments (interests and dividends) and financial incomes on investment in fixed assets. The negative impacts of financial incomes are non-linear with respect to the companies' size; financial income crowds out investment in large companies, and have a positive effect on the investment of only smaller, relatively more credit-constrained companies. Our findings support the ‘financialisation thesis’ that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term concerns for productivity in both developed and developing countries.

Keywords: financialisation, investment, non-financial sector, firm data, developing countries

JEL classification: C23: Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models D22: Firm Behavior: Empirical Analysis O16: Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

Download: Working Paper PKWP1707