Can domestic and foreign investment, guided by the Industrial Strategy and regional growth strategies, deliver the productivity gains the UK needs? This session examined the evidence and explored what more effective investment policy might look like.
The session examined productive investment at two connected levels. The first paper considered how diversified firms distribute capital across business units and how much they should alter those allocations over time. The second explored whether multinational enterprises strengthen local entrepreneurial ecosystems by developing experienced workers and managers who later join start-ups. In his introduction and closing remarks, the chair situated both papers within a wider framework linking firm investment decisions, inward investment, knowledge transfer, local capabilities and productivity. A central theme was that the productivity effects of investment depend not only on the amount invested, but also on the timing and allocation of resources, the characteristics of firms and places, and the policy institutions that connect investment with skills, business support and infrastructure.
Nigel linked the papers to a broader research agenda on how investment decisions translate into productivity. The proposed framework begins with the firm’s investment decision and follows the effects through competition, timing, knowledge transfer, local firm characteristics and place-based capabilities. An example comparing spillovers in Northern Ireland and Manchester illustrated the distinction between large benefits concentrated among a small number of firms and smaller effects reaching more widely across an economy. The policy challenge is therefore to understand both the magnitude and the reach of investment effects, and to determine where responsibility for complementary policies should sit.
The discussion highlighted the complexity of coordinating inward investment, skills, business support and transport across institutions and geographical levels. Devolved administrations may be better positioned to align these functions within a single jurisdiction, while England faces a more fragmented policy landscape.
The first paper examined how diversified firms alter the distribution of investment across business units from one year to the next. Whereas earlier resource-allocation research has largely focused on whether capital is allocated efficiently, this study focused on the degree of change in allocation patterns. The authors framed this as a continuum between dynamism and persistence. Adjustment can help a firm respond to changing legislation, technology and customer preferences, but repeated or large-scale changes can also consume managerial attention, disrupt operations and become increasingly difficult to coordinate.
The paper therefore predicted an inverse U-shaped relationship between resource-allocation adjustment and firm performance. Moderate change should improve strategic fit, while too little adjustment creates inertia and too much generates adjustment costs. The external environment was expected to modify this relationship: faster-changing industries should require a higher level of adjustment, while stronger competition should make deviations from the best-performing range more costly. The empirical analysis used several hundred listed US firms, with return on assets as the main performance outcome, and reported support for the predicted inverse U-shaped pattern and the proposed environmental effects.
The economic-significance analysis indicated that being one standard deviation to either side of the estimated turning point was associated with a 6 per cent loss in return on assets, equivalent to approximately US$51 million in net profit for the average firm in the sample. Across specifications, around 96 to 98 per cent of observations were located on the lower-adjustment side of the turning point. The authors did not interpret every firm on that side as individually suboptimal, but argued that the aggregate pattern suggested a broad tendency towards inertia. Discussion covered firm-size controls, alternative weighting by turnover or employment, the relationship with short-termism, and whether results changed across one-, two- and three-year horizons.
The second paper asked whether multinational enterprises help local start-ups grow by supplying experienced workers and managers to the entrepreneurial labour market. Building on earlier evidence that employees of multinationals are sought after by local firms and often move into start-ups, the study examined whether multinational experience among founders and early joiners affected a start-up’s initial size, survival and subsequent growth. The proposed mechanism was that multinational employees bring business experience, skills, routines, networks and managerial capabilities that may be scarce in the local economy.
Using linked employer-employee data from Sweden, the research followed approximately 13,000 start-ups established in 2000. The analysis combined information on the start-up team with characteristics including education, prior wages and the productivity of previous employers. Having at least one early team member with multinational experience was positively associated with the size of the start-up at entry. The analysis did not find an additional direct effect on survival, which the speaker suggested may be because initial size already strongly influenced survival. Multinational experience was also associated with stronger post-entry growth over five- and ten-year horizons. The strongest relationship appeared when the experienced team member had been a manager in a multinational enterprise.
The findings suggested that multinationals may support local productivity not only through direct investment and firm-level spillovers, but also by training people who later transfer capabilities into domestic start-ups. Discussion focused on sector differences, the relevance of the Swedish evidence to the United Kingdom, acquisitions and start-up exits, and selection concerns. Participants asked whether experienced managers cause better performance or are simply better at identifying promising ventures. The session also considered whether policy could encourage mobility from multinationals into start-ups and whether the United Kingdom’s scale-up challenge reflects differences in the movement of managerial talent rather than a shortage of inward investment itself.