Understanding productive investment decisions: Investment patterns and decision-making processes

Executive summary

The UK’s low level of business investment is often cited as a reason for slow productivity growth. The effects of the business environment – such as uncertainty and capital costs – on investment are well understood. However, less is known about what drives business investment and how companies make their investment decisions.

The ‘Productive Investment Decisions’ survey examined the decision-making process in 1,623 firms that made investments exceeding £5,000 between 2019 and 2024. The survey focused on two aspects of investment decisions:

• Profiling firms’ productive investment over the 2019-24 period with a focus on the motivations for investment, timing of investment and the nature of firms’ investment portfolios;
• Understanding decision-making processes for firms’ most strategic investment – this section focuses on the criteria for investment decisions, the decision making process and the team of people making investment decisions.

Each theme was explored with half of the respondents to the survey (c.830 companies).

 Key insights

• Investment motivations are complex – motivations for investment are often multi-dimensional and closely linked to broader business objectives. Although interpretation can be challenging, ‘productivity’ is frequently(80%) cited as an investment motivation, but is seldom (11%) a firm’s primary reason for investment.
• Many investment decision factors are shared – The investment motivations, objectives, financing and other factors underlying firms’ investment decisions were, perhaps, surprisingly consistent across regions, sectors and firm size bands.
• Tangible and intangible investment decisions are similar – comparing tangible with intangible investments shows that firms have similar reasoning for investments. A key difference is financing, as intangible investments are less likely to be funded by external sources.
• Internal funds dominate investment decisions – Internal company funds are most commonly used to finance investments, often alongside external funding.
• Uncertainty remains a key factor shaping investment Examining firms’ investment profiles from 2019 to 2024 highlights the influence of uncertainty. Interestingly, this uncertainty mainly had a qualitative impact, affecting the timing and returns of investments rather than the number of significant investments, the type of investments, or the amount invested.
• Investment planning often remains informal, with about half of the surveyed firms lacking a business investment plan. This issue is especially prevalent among smaller firms. Although there is no evidence that this reduces investment, it may lead to misallocated investments, which could diminish the benefits of such investments.
• Types of investment and related measurement issues – Approximately ninety per cent of firms are investing in either solely tangible assets or a mix of tangible and intangible assets.
• Investment decision teams are typically small – On average four people were involved in making business investment decisions. However, firms that made both tangible and intangible investments and firms that had a business investment plan tended to have more investment decision-makers.

 Key findings relating to firms’ investment profile (Section 2)

• Firms’ strategic objectives prioritised core business goals, especially sustaining cash flow and increasing efficiency (94%). Social objectives, such as generating social or community benefits, were less often considered important (62%). These strategic objectives were common across business size bands, sectors and locations.
• Investment motivations aligned closely with these strategic objectives. Increasing company profit and growth was often cited as the primary purpose (c. 28% of firms). Productivity improvement was often cited as one objective of investment (80% for tangible investment), but was rarely the main objective of the investment (11%).
• Investment planning is often informal, especially in smaller firms. 48% of firms lack an investment plan. Less than half of firms had a target rate of return on investment – 42% of firms making tangible investments and 31% making intangible investments. Among those firms looking to achieve a specific rate of return, about a third of firms expected an annual rate of return of up to 8%. A similar proportion expected it to be more than 14%.
• Most firms invested consistently making an average of four ‘significant’ investments between 2019 and 2024. Smaller firms and those with lower turnover made fewer investments. Most investments involved tangible assets, either solely (49%) or in combination with intangible assets (37%).
• Firms invested 13% of their turnover in tangible assets and 10% in intangible assets from 2019 to 2024. Internal company funds were the most common source of investment by far, although a significant proportion of firms used external funding for tangible (44%) and intangible investments (30%).
• External shocks adversely affected investment, especially between 2019 and 2021. 51% of firms reported impacts from COVID-19. Brexit and the crisis in the cost of doing business negatively affected 44% of firms.
• On average, four individuals participate in investment decisions. 35% are women, and 11% belong to ethnic minority groups.

Key results related to firms’ most strategically important investment (Section 3)

The key survey results, based on weighted survey data, are as follows:

• Firms tended to act swiftly when planning their most strategically important investments. 64% of firms completed their planning in less than a year, and 90% did so in under three years.
• Fewer than half of firms had a target rate of return on investment — only 39% needed to reach a specific rate when making their most critical investment. Among those targeting a specific rate, just under a third (29%) anticipated an annual return of more than 14%.
• Firms emphasised multiple purposes, expected multiple returns, evaluated several criteria, and considered numerous factors in approving their most significant investments.
• Investment planning is often informal, especially in smaller firms. 33% of these firms do not create a business case for their most strategically important investment; 25% do not evaluate the proposed investment; 23% do not measure any of the anticipated returns; and 21% do not track its performance after completion.
• In 80% of firms, the individuals involved in investment decisions usually remain the same throughout the process.
• One in three firms involve external partners in their investment decisions. Among these firms, the most common partners are private consultants (63%), other firms (43%), and business networks, trade organisations, or associations (21%).
• Investments have complementary business impacts, with 50% of firms considering potential interactions when approving their investments. Reinforcing business impacts were reported by 27% of firms.
• Formal investment planning is associated with increased satisfaction with the investment process, the returns on investment, and the positive impact on other investments.

Implications for policy and practice

It is important to recognise that the Productive Investment Decisions survey concentrates on the internal process of investment decision-making rather than external influences such as interest rates. Therefore, the main implications are more directly related to management practices and how these could be positively adjusted, rather than the wider business environment for investment.

• Support investment planning and evaluation, especially in small firms—about a third of these firms did not develop a business case for their investment, and roughly a quarter undertook little monitoring before or after investing. One possible way forward is to create additional guidance for formal investment planning and evaluation through the British Business Bank Business Essentials online resource.
• Recognise the complexity of investment decision criteria – less than half of the firms in our survey had a target rate of return on investment, with most firms having a combination of motivations for making an investment, often linked to the strategic priorities of the business and reflecting costs and related investments. In this context, factors such as environmental uncertainty are likely to be influential determinants of investment decisions alongside more internal factors.
• Strengthen ecosystem signposting and/or services – ecosystem influences are also evident in our survey through the engagement of external stakeholders in about one in three investment decisions. High-quality partners may be readily available in larger urban centres but might be less accessible in more remote or rural areas. Here, there may be a role for policy support organisations to either signpost companies to relevant support or directly provide investment advice.

Authors Eugenie Golubova and Stephen Roper