British firms’ investment behaviour is informal and cautious

Imagine you’re running a mid-sized manufacturing firm in the East Midlands. Orders are solid, the books are healthy and you’ve identified a piece of equipment that would meaningfully lift output. Your instinct tells you to go for it, but then you start questioning: What if there’s a downturn? What if it underperforms? Better to hold the cash, keep options open and wait and see. And so another investment that looked sensible on paper gets quietly shelved. You don’t reject it, it just gets deferred indefinitely.

This scenario, multiplied across thousands of British businesses, might go a long way toward explaining one of the more stubborn puzzles in the UK’s productivity slump: why do British firms consistently invest less than their counterparts in comparable economies?

For decades the usual suspects have been lined up: uncertainty; sluggish demand; access to finance; low public sector investment. Two new studies from The Productivity Institute suggest those answers aren’t wrong, but don’t tell the whole story. The missing piece lies inside the firms themselves: management culture and processes that are ambitious in aspiration but often informal and risk averse when it comes to committing capital.

What affects UK managers’ investment decisions?

How do UK managers make an investment decision? A new report, Understanding productive investment decisions, by Eugenie Golubova and Stephen Roper, zooms in on how investment decisions actually get made inside UK firms and finds a process that is often far less structured than you might expect.

The study is based on a nationally representative survey of 1,623 UK businesses that made a significant investment of at least £5,000 at some point between 2019 and 2024. Some of what it found is striking. Nearly half of those firms had no formal investment plan. One in three did not write a business case before committing to a major project. One in five did not track performance once the investment had been made.

This matters because a lack of formal planning and informal risk aversion are a particularly bad combination. When a manager is already inclined toward caution and the organisation provides no structured process for evaluating opportunities – no written case, no baseline against which to measure success – there is nothing to push back against that caution. Opportunities don’t get considered and then rejected. They often simply don’t get considered at all.

The survey also illuminates how uncertainty affects behaviour in practice. Rather than killing investment outright, economic or political instability tends to delay or shrink projects, which is consistent with the “ambitious but cautious” profile identified in the attitudinal work (see below). Firms want to invest, but they hang back, scale down and wait.

Financing habits add another layer to this picture. Based on the survey, around 85% of tangible investment was funded from internal cash. External finance, like bank loans and equity, played a supplementary role at best. For managers already inclined toward caution, the obligations that come with external borrowing represent yet another potential downside to weigh up and can cause them to hold back, even when there are attractive opportunities for investment.

Why do UK firms invest less than their international counterparts?

For years, a quiet assumption has underpinned much of the debate about UK business investment: that British managers are, fundamentally, less hungry for growth than their international peers. Do they just aim lower and think smaller?

Our second report, Ambitious but risk averse, by Tera Allas and Stephen Roper, sets out to test that assumption and found it doesn’t hold. Drawing on 34 survey measures from five established cross-national datasets, covering fifteen high-income OECD economies, the research shows that UK managers score no lower than their counterparts in Germany, France, the United States or other comparator nations when it comes to ambition and goal-orientation.

Where they differ, and differ measurably, is in their relationship with risk.

UK decision-makers are measurably more loss-averse and risk-averse than their international peers – meaning they feel potential losses more acutely than equivalent gains and shy away from investments with a more dispersed risk profile.

They are also more prone to what behavioural economists call “satisficing”: choosing an outcome that is good enough rather than spending more time and resources to find one that is as good as it could be. These attitudes could be a rational response to the uncertainty and incentives managers face; but even so, they are likely to constrain investment.

So the picture that emerges is not one of managers who lack drive. It is one of managers who have plenty of drive, but apply a heavier brake on it than people doing equivalent jobs in comparable countries. UK managers are ambitious, but they also place a lot of weight on what happens if things go wrong. And that worry shapes decisions in ways that compound over time.

What does this mean in practice?

First, it complicates the standard policy toolkit. Most government policy designed to boost business investment assumes decision-makers are rational and profit-maximising. Hence, most interventions improve the expected average returns: tax allowances, capital reliefs, or innovation subsidies. The logic is that if you make investment more profitable, more of it will happen.

But if the primary constraint is not insufficient reward but fear of loss, that logic may be less effective in the UK than it is elsewhere. A manager who is primarily worried about what happens if a bet goes wrong is not necessarily going to be moved by a slightly improved return if it goes right. What might actually influence them is knowing the downside is limited and that if things go badly, there is some protection in place.

The research suggests instruments like loan guarantees or first-loss structures, which reduce the consequences of failure rather than enhancing the potential prize, could be worth taking more seriously.

Second, the findings raise questions for boards and shareholders. Incentive structures in many organisations, particularly in public companies, are designed to prevent failure. Managers who never take risks are rarely penalised. But those same incentive structures may be inadvertently cementing a culture of excessive caution. This can result in a culture in which playing it safe is always the rational career move, even when the organisation as a whole would benefit from bolder decisions.

Third, the lack of formal planning finding points to something practical that firms can do themselves. Where companies used formal investment planning, such as a written business case, defined targets or post-investment review, they reported meaningfully higher satisfaction with how their investments turned out. What many people often view as unneeded bureaucracy is actually about creating the conditions in which a good idea can be properly evaluated rather than quietly shelved.

How can this challenge be tackled?

None of this should be taken to mean that UK managers are uniquely timid individuals, or that caution is always the wrong call. In many situations, being careful with capital is entirely sensible. The research is careful on this point: the tendency toward risk aversion is partly a reflection of the broader UK population, and partly a consequence of how companies select and promote managers. In other words, an aspect of organisational culture, not just individual psychology.

But culture can be changed. While there is no simple, quick fix, initiatives such as entrepreneurship and management training can make a real difference. The UK’s investment problem is not that its business leaders lack ambition. It is that ambition and caution are operating simultaneously, with one pressing the accelerator and the other resting on the brake. Understanding that dynamic, and taking it seriously, seems like a necessary step toward doing something about it.

Ambitious but risk averse: UK manager attitudes and the investment gap (Tera Allas CBE and Stephen Roper) is published by The Productivity Institute. Understanding productive investment decisions: investment patterns and decision-making processes (Eugenie Golubova and Stephen Roper) is a joint publication by The Productivity Institute and the Enterprise Research Centre.

If you’d like to hear more from the authors and find out more detail on the research, listen to our Productivity Puzzles podcast episode, Why do Firms (not) Invest?, which features Tera Allas, Stephen Roper and Catherine Mann.