Factors in business investment: an expectation based approach using business survey data

This paper analyses the determinants of the investment decision by focusing on the firms subjective judgments about the impact of some economic factors. This work uses data from the INSEEs business surveys on investment in the industry, over the period 1991-2002. In October, these data contain firms opinions about the effect of the different determinants on their expected capital expenditures. These original and complex data are first studied by using the aggregate indicators (opinions balances, for example) traditionally used by economic forecasters. We then identify a hierarchy that clearly separates real factors (demand, profits and technology) from financial ones. Nevertheless, this hierarchy is only based on aggregate opinions about factors. That is why we estimate the relationship between opinions about each factor effect and expected investment spending by using a random effects Tobit model applied on individual data. This approach emphasizes on the degree of coherence between opinions and plans. Moreover, capital expenditures are distinguished according to their main economic purpose: expansion of production capacity, modernization or rationalization, replacement and new products manufacturing. One main result is that respondents clearly evaluate each factor effect by referring to specific kinds of spending, and not to their global investment. As an example, opinions about expected demand only appear consistent with investments aiming at expanding production capacity. The previous hierarchy is then globally confirmed and significantly refined.