Firms' investment and capacity utilisation : the role of financial constraints and uncertainty

This paper studies the role of capacity utilisation in explaining investment behaviour in Italian SMEs and large firms. We propose a framework in which firms with high capacity utilisation are more likely to invest in maintaining a buffer against future shocks. Using firm-level data from the Bank of Italy’s Survey of Industrial and Service Firms (2002–2024), we empirically examine how deviations from a sector-specific target capacity utilisation influence investment decisions, accounting for the roles of uncertainty and financial constraints. Our findings reveal that Italian firms with high growth potential- those at the so-called "growth window" (Coad et al., 2021)- are more likely to invest. This result is primarily driven by large firms, while SMEs do not seem to respond strongly to the presence in such growth windows. Furthermore, we find that uncertainty does not deter investment among firms operating at high capacity, but instead stimulates investment in firms with low capacity utilisation. These insights have significant implications for industrial policy that targets support to firms at critical decision points in their growth trajectory.