Rising profits with declining investment? An empirical investigation

Rising profits with declining investment? An empirical investigation

The paper is a contribution to explaining the phenomenon of the slow investment growth in recent decades, which accompanied ever-rising profits. It investigates profit share and capacity utilization effects on the investment share of output for US nonfinancial corporates. It utilizes the demand regime literature to explore the effects of income distribution and production capacity on Investment. We use the US nonfinancial corporate businesses data for (1960-2018) as a sample. The tested dependent variable is the investment share of output, while the independent variables are the profit share of output and capacity utilization, expressed as the ratio of output to nonresidential fixed capital. Given the nonstationary and absence of cointegration in the tested variables, the econometric test is based on a vector Autoregression model that uses the (Toda and Yamamoto 1995) procedure to test for Granger causality. The paper finds that profit share does not Granger-cause investment share of output, while capacity utilization does Granger-cause the investment share, which puts into question the feasibility of profit-led growth policy. The paper confirms the validity of the late Kaldorian view of the relationship between income distribution and growth, which has emphasized a prominent role of capacity utilization in determining investment.

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Borazan, A. (2019). Rising profits with declining investment? An empirical investigation. Journal of Applied Economic Sciences, XIV(Winter,4(66)), 1136–1141. http://cesmaa.org/Extras/JAESArchive