What Factors Influence Firms’ Investment Decisions?

Abstract

Business investment in mainland Norway has been relatively weak since the financial crisis, even though the key policy rate has been reduced to a historically low level. Through its Regional Network, Norges Bank has interviewed Norwegian firms about their investment level and the reasons for their investment decisions. This survey is designed to shed light on factors that may have contributed to dampening investment growth. Over 75 percent of the firms surveyed reported that investment has been at an appropriate level over the past five years in relation to investment needs. The firms reporting that investment was too low in the period point to greater economic uncertainty and a lack of internal funds. Internal funds are reported to be the most common financing source for business investment. Few firms report that access to external capital is an obstacle to investment. This indicates that Norwegian financial markets are functioning well. A third of the firms base their investment decisions on rules of thumb, where the interest rate level is of lesser importance. Nearly half use both economic models and rules of thumb. The direct effect of the interest rate on investment decisions through its impact on capital costs appears to be somewhat less pronounced than theoretical relationships would suggest.