For 2014, an economic upswing seems likely across the Eurozone in

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1 Will corporae invesmen ake off again in France in 2014? Jean-François Eudeline Yaëlle Gorin Gabriel Sklénard Adrien Zakharchouk Déparemen de la conjoncure For 2014, an economic upswing seems likely across he Eurozone in general, and in France in paricular, bu he pace will depend mainly on he change in corporae invesmen. In France, however, his decreased in 2013 for he second year running (-1.8%, afer -1.9% in 2012). Some analyss fear ha invesmen will be slow in aking off in France for several reasons: hey believe ha France as a whole is no longer compeiive, ha companies do no have he means o inves because of he drop in heir margin rae since 2008 and he ighening of bank credi and lasly, companies seem o be able o mee new demand wih he capaciy hey already have and which is currenly no required. The purpose of his repor is o assess how relevan hese differen argumens are, especially in view of corporae invesmen performance in France since he beginning of he 2000s. From he poins presened here, he following conclusions can be drawn: - in France, apar from cyclical variaions, he corporae invesmen rae has increased slighly since he end of he 1990s. Today is level is above is average, alhough his is probably he low poin of he cycle. This upward rend, which in volume is even more pronounced given he falling rend in prices in relaion o invesmen, can be compared wih he significan drop in he cos of corporae financing since he beginning of he 1990s; - since 2008 in paricular, corporae invesmen seems o have sayed aligned only o flucuaions in demand, as if he ohers unfavourable facors (fall in margin rae, credi squeeze, uncerainy over business prospecs in he medium erm) had been offse by favourable facors such as low cos of corporae financing and, o a lesser degree, invesmen suppor measures aken since 2008 (aboliion of he professional ax, exension of he research ax credi, assisance wih cash-flow for companies in difficuly a he peak of he crisis, credi mediaion); - furhermore, since he beginning of he 2000s, corporae invesmen in France has developed favourably compared wih oher European economies. In Germany, he Unied Kingdom, Ialy, Spain, he invesmen rae (as a raio of value added) is oday beween 2 and 7.5 poins lower han he 2000 level, whereas in France i is he same; December

2 Will corporae invesmen ake off again in France in 2014? - if we look only a invesmen excluding consrucion, he siuaion in France remains favourable. From 2000 o 2007, all rends in he major European economies were similar, apar from he Unied Kingdom, where here was a marked drop in invesmen raes. Since 2007 however, adjusmen in France has been less pronounced, as he drop in he oher economies was wo o four imes greaer; - how can we accoun for his improved French performance since he beginning of he Recession? Compared wih Ialy and Spain, he reason can be found quie naurally in he fac ha he crisis was on a smaller scale, especially since 2011: invesmen overreaced in he shor erm o flucuaions in aciviy, his is he «acceleraor» effec. Performance in relaion o Germany is more surprising, where he economic oulook was more favourable, exernal compeiiveness seemed beer boh in erms of level and of rend, and companies were in a much more favourable financial siuaion. The gradual divergence, since he end of he 1990s, beween labour coss in France and Germany could have led o capial/labour subsiuion behaviour which favoured capial in France; - for 2014, he mos likely scenario seems o be an increase in French corporae invesmen bu a a similar rhyhm o ha of GDP. On he one hand, he laes available daa, and also analysis of previous recoveries, give credence o an upswing in invesmen in he wake of aciviy. On he oher hand, he relaive resisance of invesmen excluding consrucion in recen years is unlikely o lead o a paricularly marked cach-up phenomenon, and invesmen in consrucion is sill showing no signs of recovery. 20 Conjoncure in France

3 Will corporae invesmen ake off again in France in 2014? In France, corporae invesmen has held up fairly well since 2008 Invesmen rae in a growh rend since he end of he 1990s This dynamism in invesmen since 2000 can be seen paricularly clearly in services No downward break in corporae invesmen raes compared wih he pre-crisis average The corporae invesmen rae (i.e. invesmen as a raio of value added 1 ) moves cyclically: i increases in periods of expansion, and decreases during economic slowdowns. Since 1997 however, his cyclical dynamic has been accompanied by a sligh growh rend, wih he invesmen rae a he dip in he cycle increasing from 15.4% in 1997 o 16.3% in 2004 hen o 16.9% in Thus in Q3 2013, when France was in all likelihood close o he low poin in he cycle, he invesmen rae of non-financial enerprises (NFEs: non-fiancial corporaions and unincorporaed enreprises), calculaed as he raio of he gross fixed capial formaion (GFCF) of NFEs in value o he value added of NFEs in value, reached 17.6%, higher han is pre-crisis average 2 (see Graph 1). If we consider he peaks, in 2007 he invesmen rae was 1.5 poins higher han he 2000 level, even hough economic growh was far less dynamic in 2007 han a he end of he 1990s. Alhough he 2011 peak was lower han ha of 2007, i was neverheless abou 0.5 poins higher han ha of Given he falling rend in he relaive price of invesmen, his relaive dynamism in invesmen as a raio of value added since he end of he 1990s is even more marked if we look a variables in volume, deflaed for prices: invesmen has grown by 52% since 1997, agains 37% for value added. Analysis by produc is modified, however. In erms of value, his apparen rend can be aribued o he increase in raes of invesmen in consrucion and services (respecively +1.5 poins and +1.0 poins since 1997). Conversely, he rae of invesmen in manufacured goods, which is very cyclical, is oday slighly lower han in 1997 (see Graph 2). In volume, on he oher hand, invesmen in consrucion grew more slowly han value added over he period, and invesmen in manufacured goods increased more quickly han value added beween 1997 and he presen. In services, he rend in invesmen grew faser han value added, boh in volume and in value. The upward rend in he NFE invesmen rae seen since he beginning of he 2000s can also be analysed hrough branches of aciviy (see Graph 3): i was driven by he dynamism of invesmen raes in value in companies in he manufacuring and marke services branches (respecively +0.6 poins and +1.6 poins beween 2000 and 2008), whereas in he consrucion branch, invesmen rae in value remained remarkably sable during his same period, flucuaing around 8% (a much lower level han in he oher wo branches). However, his value analysis should be qualified in he ligh of changes observed in GFCF prices and he value added in each of hese branches. Thus, given he increase in he relaive price of invesmen in relaion o value added in he consrucion branch since he end of he 1990s, he invesmen rae by volume, insead of being sable, has in fac proved o be dynamic since Furhermore, relaive prices in he manufacuring and services branches have seen opposie rends during his period. The diagnosis for hese wo branches is herefore slighly modified: while invesmen in volume in he marke services branch has acceleraed considerably compared wih value added since 2000, in he manufacuring branch, i appeared unil 2007 o be cyclical around a level ha was a bes sable. In 2012, however, i is a a higher level han in 2007 (see Eudeline, Sklénard, Zakharchouk, 2012). (1) In his repor he invesmen rae is defined by defaul wih value variables. (2) December

4 Will corporae invesmen ake off again in France in 2014? 1- Changes in he invesmen rae of NFEs 2- Invesmen rae of NFEs by produc ype 3 - Invesmen rae by branch 22 Conjoncure in France

5 Will corporae invesmen ake off again in France in 2014? The share of invesmen dedicaed o renewal is also in an upward rend More and more shor-lived asses There is no saisical source wih which o measure direcly he share of invesmen dedicaed o renewal of capial. However, several indices sugges ha i is in an upward rend. Firsly, according o he INSEE s indusrial invesmen survey, in which several housand companies wih more han 20 employees in he manufacuring branch are quesioned every quarer, renewal has become he prime moivaion o inves, ahead of he inroducion of new producs, whereas in 2000 he reverse was rue (see Graph 4). Analysis of he responses provided by companies reveals hree rends. Firs, he share of invesmen by indusrial companies ha is dedicaed o renewal has grown regularly since I has increased by 12 poins, and is now he main moivaion for invesmen. Nex, invesmen linked wih he inroducion of new producs decreased regularly from 2000 o 2008 (-6 poins) and now seems o have sabilised. Invesmen in modernisaion is cyclical, wih wo dips in 2004 and In paricular, invesmen in he auomaion of exising producion processes fell slighly in favour of invesmen in energy savings. These rends were fairly uniform, depending on company size and branch of aciviy. In heory, his increase in he invesmen share devoed o renewal, alhough aribuable o an acceleraed ageing of companies producive capial, wih an unchanged srucure, may lead o a emporary rise in invesmen, and could help explain he sligh upward rend in he invesmen rae since he end of he 1990s. However, here is insufficien daa o validae his explanaion empirically: in naional accouning, he average age of asses excluding consrucion (approximaed by he difference beween amorisaion and decommissioning) has shown no rend since he end of he 1990s. In conras, his increasing invesmen share devoed o renewal may be linked wih he disorion over he las weny years in he srucure of NFE capial in favour of shor-lived asses (see Graph 5). This rend of growh in he rae of invesmen in services is a resul of he specacular increase in invesmen in compuers (+160%) and in sofware (+140%), which are amorised over an esimaed five years. In conras, invesmen in consrucion, where he amorisaion period is esimaed a beween weny-five and hiry years, has grown moderaely, like value added (+33%). Can he decrease in he average lifespan of asses accoun for he sligh growh rend in he invesmen rae? 4 Invesmen moivaions according o he enerprises quesioned in he INSEE Invesmen Survey December

6 Will corporae invesmen ake off again in France in 2014? The answer is somewha negaive. I is cerainly rue ha for a given capial sock, a shorer lifespan implies a higher invesmen in renewal. On he oher hand, however, he decrease in he lifespan of asses leads o an increase in he cos of capial, and hence modifies he producion funcion o he disadvanage of capial and ulimaely reduces he share of invesmen in value added. Moreover, he disorion of he srucure of NFE capial owards invesmen in shor-lived asses is also observed in our main parners (and even more so in he Unied Kingdom, which is closer o he Unied Saes in erms of invesmen in new echnologies) whereas for hem he dynamics of he invesmen rae were less favourable, as we shall see nex. The corporae invesmen rend since 2007 is more favourable in France han in he oher major European economies I is in France ha recen invesmen rends have been mos favourable The siuaion in France since 2007 remains favourable if we consider only invesmens excluding consrucion The rae of invesmen by non-financial companies 3 in each of he five major European economies is governed firs of all by he economic cycle (see Graph 6): a drop a he beginning of he 2000s hen an increase unil 2007, a fall in , a fleeing upurn in 2010, and a drop once again unil he presen. Ye we can disinguish some idiosyncraic forms of behaviour: he invesmen rae was virually sable in Ialy from 2000 o 2007; he drop a he beginning of he 2000s was paricularly marked in Germany, as was he upurn from 2004 o 2008 in Spain; he fall since 2008 in Spain has been specacular, and less so in Ialy and he Unied Kingdom. Overall, from 2000 unil he presen, he drop in invesmen rae was beween 2 and 7.5 poins in Germany, Ialy, he Unied Kingdom and Spain; i was 3 poins in he Eurozone and nil in France. The invesmen rae sudied previously has he disadvanage of including invesmen in consrucion, which is ofen considered less producive han oher asses and hence less relevan in erms of invesmen analysis. In his par, we herefore consider invesmen excluding consrucion. (3) European daa are available only for non-financial companies, which are very similar in scope o non-financial enerprises. 5 - GFCF by asse ype 24 Conjoncure in France

7 Will corporae invesmen ake off again in France in 2014? The diagnosis remains for he mos par unchanged when we consider he invesmen rae excluding consrucion (see Graph 7). Overall, he drop in he invesmen rae since 2000 is around 1 poins in France, compared wih over 2 poins in Germany and Spain, over 3 poins in Ialy, and abou 4 poins in he Unied Kingdom. The diagnosis is he same overall if we consider variables in volume. The only noable difference is in Germany, where invesmen dynamics were sronger before he crisis (especially in "oher machines and equipmen"), wih he resul ha from 2000 o he presen, rends are more in agreemen beween France and Germany. Economeric modelling confirms he resisance of French corporae invesmen in recen years. From he conclusions drawn in he firs par, corporae invesmen as a raio of he value added of companies seems o have enjoyed a fairly favourable dynamic over he las fifeen years, compared wih our main European parners. 6- Invesmen rae of non-financial companies How o read i: he invesmen of non-financial companies is only available in annual daa and by value. Source: Eurosa 7- Rae of non-consrucion invesmen How o read i: he European daa do no allow invesmen excluding consrucion o be isolaed solely for non-financial companies. Source: Eurosa December

8 Will corporae invesmen ake off again in France in 2014? Several heoreical deerminans of invesmen: invesmen profiabiliy To confirm he robusness of his diagnosis, in his par we presen he resuls from economeric esimaes of invesmen which model is dynamic in he pas based on is main deerminans. Invesmen observed over he recen period is hen compared o he simulaions from he model, o assess wheher his is "overinvesmen" or "underinvesmen" on he par of companies. The same exercise is han carried ou for he Eurozone for comparison purposes. When companies are no consrained eiher in heir oules or in heir financing, he user cos of capial is he ulimae deerminan of heir capial raio, in oher words he relaionship beween heir capial sock and heir value added: when he yield from supplemenary invesmen exceeds he cos of he capial, hen i is profiable for he company o inves a supplemenary uni of capial. Anoher way of assessing invesmen profiabiliy is o use Tobin s Q, inroduced by James Tobin. Tobin s Q is he raio beween a company s sock marke value and he value of is capial: if Tobin s Q is greaer han 1, hen he benefis ha invesmen brings are greaer han heir cos, and i is he righ ime o inves. This is neverheless a very imperfec indicaor: i supposes ha he sock marke value is a good measure of he inrinsic value of a company, which is no always he case, especially when here is an economic "bubble" surrounding he share price, and i also assumes ha he profiabiliy of supplemenary invesmen is indeed measured in erms of ha of previous invesmens. For hese reasons, is correlaion wih he level of invesmen is generally empirically low.... rade oules... In he shor erm, when companies are consrained by heir oules, he main deerminan of invesmen is demand: he sronger he demand, he more companies mus inves o adap heir producion capaciy. However, as capial represens a large muliple of invesmen, if companies wan o increase heir capial by 1% hey mus increase heir invesmen by a lo more han 1%. This is called he acceleraor effec and implies ha a small variaion in demand leads o a larger variaion in invesmen.... financing consrains... Corporae invesmen may also depend on consrains relaing o access o finance. If a company s own resources are insufficien, hen i will borrow o inves. Because banks run a significan risk ha hey will no be repaid, and also because hey do no have all he necessary informaion o assess he risk of no being repaid, hey may refuse o lend or will lend a very high ineres raes o companies ha are already heavily indebed, or which have very low profi levels. There are differen characerisics ha can indicae a company s sae of financial healh and which influence access o finance, alhough none is fully saisfacory: burden of deb, level of self-financing, profi level, level of margin rae. In he esimaed equaion, i is he company margin rae (raio beween gross operaing surplus and value added) ha is used. This has he advanage of being a "proxy" boh for financing consrains and for he average profiabiliy of invesmens 4. Of course he decision o inves depends on marginal profiabiliy, and no on average profiabiliy of he capial insalled. In addiion, a low margin rae can also, in cerain cases, encourage companies o increase heir invesmen effor. For example, hey may increase auomaion of producion in order o reduce wages. Empirically, however, he resul is ha a drop in margin rae penalises invesmen in France, over he esimaion period.... uncerainy Invesmen depends on many consrains relaing o he financial secor, demand and he healh of a company. The uncerainy surrounding flucuaions in hese facors also conribues o poenial invesmen deerminans. Once he decision o inves has been aken, i is ofen cosly for a company o backrack if he economic condiions change and make he invesmen unprofiable. For (4) Also, his variable is less fragile han variables in he boom half of he balance shee. 26 Conjoncure in France

9 Will corporae invesmen ake off again in France in 2014? Invesmen in France oday is slighly higher han wha he deerminans forecas... The drop in he cos of financing companies has simulaed invesmen example, here may be underinvesmen if demand is very volaile or uncerain. This las invesmen deerminan is very difficul o measure, which is why i has no been esed here. Macroeconomic modelling of invesmen is based on error correcion using an equaion which akes ino accoun he shor-erm adjusmen dynamic owards a long-erm arge (see Box 1). The idea is ha he invesmen deerminans menioned above can have a differen effec in he shor erm (afer one or more quarers) and in he long erm (several years). For example, he acceleraor effec implies an elasiciy of demand o invesmen ha is very much greaer han one in he shor erm, whereas in he long erm i is one. By focusing on he area of producs "excluding consrucion", he resisance of invesmen idenified in he firs par is confirmed: oday he level of invesmen seems overall o be in line wih is deerminans, and here was even a significan rise in invesmen observed from 2010 o 2012, which has no been compleely eliminaed 5 (see Graph 8). This resul may seem surprising, as some key variables are missing from our model which should have affeced invesmen in recen years, such as he ighening of bank credi condiions and he exreme uncerainy surrounding economic prospecs, and even he fuure of he Eurozone in is curren form. The analysis of he corporae invesmen rae carried ou in he firs par revealed an apparen upward rend since he 1990s, which may seem o conradic he resul ha shows ha invesmen oday conforms o is deerminans. The answer, in fac, is o be found in he long-erm invesmen deerminans. If he long-erm relaionship of he equaion is rewrien (see end of Box 1), hen he invesmen is no supposed o evolve only like value added. I also depends negaively on he real cos of capial and posiively on companies margin rae. Lasly, i depends eiher posiively or negaively, depending on wheher invesmen is considered in value or in volume, on he relaive price of he invesmen in relaion o value added. The evoluion of he long-erm arge for he invesmen rae, by value and by volume, is shown below (see Graph 9). From he beginning of he 1990s unil he middle of he 2000s, he cos of financing companies dropped subsanially, as did he relaive cos of invesmen, while he margin rae overall remained sable. As a resul, he long-erm arge of (5) However, we should remember ha he 2011 daa (2012 respecively) will no become definiive unil May 2014 (May 2015), wih he publicaion of he definiive accouns. 8- Invesmen in non-consrucion producs, Banque de France December

10 Will corporae invesmen ake off again in France in 2014? Box 1 - Esimaion of he "invesmen excluding consrucion" equaion We choose o model corporae invesmen exclusive of consrucion producs, a choice also made in oher sudies 1, because he consrucion (30% of oal invesmen) invesmen cycle is no ypical of he overall macroeconomic cycle. The behaviour of invesmen in consrucion is differen from he oher componens of invesmen, paricularly in he 1990s (see Graph 2). I hus disrups he esimaion of corporae invesmen behaviour, o he exen ha he invesmen forecas is acually beer when i disinguishes invesmen excluding consrucion from invesmen in consrucion. The long-erm invesmen balance is he resul of profi maximising behaviour among producers. We use a neo-classical framework wih wo facors of producion (capial and labour) and a CES (consan elasiciy of subsiuion) producion funcion. The ineremporal profi maximisaion is wrien: Max K. I + = 0 y l py ωl pi ( + 1 β i) I= 0 under consrain s : ( δ ) K = K + I r r [ ( ) ] ( 1 r ) 1 Y = ak + a L where: -I and Y are invesmen and producion in volume, -p X is he price of value X, - ω L is he cos of payroll, K, capial, - δ is he capial depreciaion rae and β is he discoun rae, - r = 1 1 where σ is he elasiciy of subsiuion beween capial σ and labour. K By wriing, C p l δ 1 I ( 1+ p ) = β 1 he resoluion resuls in he equaion: InK InY In C K = σ y p K where = σ + f( δ, K ) y InI InY In C p he user cos of capial, (1) see for example Bardaji and alii (2006) (2) As he margin rae is non-saionary, is level canno empirically affec invesmen in he shor erm only. (3) The cos of capial and he margin rae are no significan in he shor erm in our esimaions. (4) The sandard deviaions are given in parenhesis. (5) As he amorisaion of NFEs is no available, we aggregae he amorisaion of he marke branches excluding real-esae services and financial services. We verify ha he las erm of he previous expression is saionary, hence i does no influence long-erm invesmen. Addiionally, we assume ha financing consrains, approximaed by he margin rae, influence invesmen behaviour including in he long erm 2. In he shor erm 3,variaions in invesmen reac o variaions in value-added (acceleraor effec) and o he disance from is long-erm arge (resoring force). Formally, his is esimaed by a wo-sep error correcion model (ECM) wih a DOLS esimaion of he long-run equaion (Sock and Wason 1993), which gives a less biased esimae a finie disance. As invesmen is a componen of demand, here is an accouning relaionship beween invesmen and value-added. An insrumenal variables esimaion correcs he endogeneiy bias. The insrumens used are household consumpion and expors of producs from he non-agriculural marke secor (NAMS). The equaion esimaed over he period 1989Q4-2010Q4 is wrien 4 : ΔInI = 03, + 21,. ΔInY ( 015, ) ( 036, ) 1 007, InI 1 InY 1+ 06In C k 36 y ( 003, ) (* ) p (* ) 1 ( 008, ) + 03,. ΔInY + ε 1,.,. Tx_ marge 1 where: - I is invesmen excluding consrucion by NFEs in volume, -Y is he value-added of he NAMS branches in volume, - C K K l l is he user cos of capial: C p ( δ + β p ), l I - p is he GFCF deflaor excluding consrucion, p is year-on-year value and δ he amorisaion rae of NFEs 5. - p Y he value-added deflaor, - Tx_ marge is he margin rae of NFEs; As he variables enering ino he long-run equaion are all order one inegraed, we esed for he exisence of a unique coinegraion relaionship beween hem. The Johansen es validaes his hypohesis. Addiionally, he Shin es validaes our long-run relaionship a he 5% hreshold. Noe ha he equaion s long-run relaionship can be wrien as follows depending on wheher we are ineresed in invesmen in value or in volume: In( p l I ) In( p Y Y) In p l. =. 481, + 041,. Y p K C 059,. In + 365,. Tx_ marge l p In( I ) In( Y ) In p l In C K = 481, 059,. 059,. Y l p p +365,. Tx_ marge 28 Conjoncure in France

11 Will corporae invesmen ake off again in France in 2014? Everyhing is as if invesmen had reaced only o flucuaions in demand since 2007 invesmen in volume saw a growh rend over he period, whereas his rend was barely percepible in value, due o he drop in he relaive price of invesmen. The long-erm arge has sabilised since he middle of he 2000s, boh in value and in volume, because he coninuing fall in ineres raes offse he fall in he margin rae, while he relaive price of invesmen sabilised. Today, he long-erm arge of invesmen in volume remains 1.5 poins higher han in he middle of he 1990s, which explains why he invesmen rae was higher han a he beginning of he 2000s. Thus he apparen upward rend of he invesmen rae can be inerpreed as simply he convergence owards a new regime of higher capialis inensiy, brough on by he drop in he cos of financing companies. The deerioraion in companies margin rae since 2007 seems o have been offse by he coninuing drop in he cos of financing. On he face of i, his is a surprising resul. The sharp drop in he margin rae in France in recen years, along wih a drop in he equivalen savings raio, is indicaive of a deerioraion in companies financial siuaion and heir profiabiliy. This is likely o impac on he volume of invesmen. 9 Long-erm invesmen arge excluding consrucion 10 Facors influencing invesmen How o read i: he poin for 2014 corresponds o he forecass by indusrialiss surveyed in Ocober oulook surveys December

12 Will corporae invesmen ake off again in France in 2014? The credi crunch appears o have played a secondary role in France This resul, alhough surprising, is neverheless consisen wih he replies companies gave o he indusrial invesmen survey, menioned in par one. In Ocober every year companies are quesioned on he facors ha influence heir decision o inves: for he curren year hey are asked o describe hese facors as simulaive or resricive. In 2013 he oal relaing o domesic demand was abou 23 poins lower han is 2004 level (wih he difference being half his for foreign demand). However, oals for responses concerning self-financing, overall financing condiions and expeced profis did no seem, iniially, o be any more resricive oday han before he crisis (see Graph 10). This resul can perhaps be explained, alhough i is no possible o quanify heir conribuion, by he numerous governmen policy measures inended o simulae corporae invesmen, direcly or indirecly. Firs, he professional ax, which only affeced capial, was abolished in 2010, and replaced by a ax on value added, which herefore no only affeced capial bu also labour 6. In addiion, he research ax credi was exended significanly in 2008 (removal of he ceiling, increase in credi raes, suppression of he share calculaed agains increased expendiure), wih is cos rising in jus a few years by 5 billion euros 7. In addiion, "Invesmen for he Fuure" was launched in 2010, and he amouns conracualised reached 19 billion euros in Q Finally, when he financial crisis was a is heigh owards he end of 2008 and he banks were ighening heir condiions for access o credi, several measures were aken o suppor company liquidiy (suppor from Oséo, reimbursemen of ax debs, credi mediaion, ec.), which could be considered as indirec aid for invesmen. Sudies on French daa sugges ha credi consrains played only a (6) The professional ax had already been reduced in 2006, wih he revision of ax relief for new invesmens and he seing of a ceiling according o value added. (7) I is rue ha research and developmen (R&D) are no recorded in invesmen in he naional accouns, however, an increase in R&D expendiure riggers supplemenary invesmen. (8) Annual repor on he implemenaion of Invesmens for he Fuure programme Invesmen growh in manufacuring Scope: legal unis (UL) submiing a reurn for axaion on heir BRN (normal real profi) in manufacuring indusry. Definiion: independen UL are enerprises which are no par of any group during he observaion period. How o read i: in 2009 in manufacuring, invesmen decreased by 28% on average among legal unis which are affiliaes of groups, agains 24% among independen legal unis. When he zones bordered by dashes are disjoined, hese wo averages can be considered as significanly differen. Growh raes are defined as in Davis and Haliwanger as (x-x- 1 )/(0.5*(x + x- 1 ))., BRN ( ), Ésane ( ). 30 Conjoncure in France

13 Will corporae invesmen ake off again in France in 2014? relaively minor role in France, and would only have affeced invesmen a lile (see Guinouard, Kremp and Randriamisaina and also Kremp and Sevesre). In paricular, subsidiaries of groups experienced a larger drop in aciviy in 2008 and 2009 han independen companies, especially in manufacuring. I was he companies ha are leas likely o suffer financial consrains which made mos adjusmens o heir volume of producion in he shor erm, and also heir levels of employmen and invesmen. These poins sugges ha in France companies have suffered more from a demand shock han a credi shock (see Graph 11). In he Eurozone, invesmen is raher weaker han he deerminans forecas Economeric modelling of he Eurozone produces conclusions ha are raher more nuanced han he diagnosis made in par one. Underinvesmen in he Eurozone in recen years is highly dependen on he specificaions and esimaion period seleced, as i varies from 0 o 6% (see Graph 12 and Appendix). The scale of underinvesmen is reduced when he equaion is applied up unil he end of 2010, as he exended period of weak invesmen from 2008 ends o diminish he resoring force owards he long-erm deerminans, and hence o pospone a reurn o he long-erm arge. This difference herefore appears o be emporary. However we consider i, and whaever specificaion and esimaion period are seleced, we see underinvesmen in he Eurozone in he las few years, while he opposie is he case for France. As we have seen in par one, his resul sems mainly from Germany, where invesmen declined more han in France, alhough he economic siuaion here had deerioraed less (see Goldman Sachs Global Economics). Conclusion: wha invesmen for 2014? From he resuls presened in his repor, he corporae invesmen rae seems o have experienced a growh rend since he 1990s. The reason for his is he coninuous drop in he cos of financing. Since he crisis in paricular, invesmen in France has shown more resisance han ha of is European parners. Today, economic aciviy appears o be picking up, boh in France and in he Eurozone: he business climae has grealy improved since he beginning of he year; and year-on-year GDP a he end of 2013 will probably sele a +0.7%, compared wih -0.3% a he end of Corporae invesmen is also showing a beer rend (-0.7% expeced year-on-year a he end of 2013, agains -3.1% a he end of 2012), bu coninues o conribue negaively o growh Invesmens in asses excluding consrucion in he Eurozone December

14 Will corporae invesmen ake off again in France in 2014? Box 2 - Invesmen behaviour in previous recovery periods Over he las wo decades he French economy has been hi by hree recessive episodes: he 1993 recession, he slowdown following he bursing of he inerne bubble in 2001 and he recession of Each of hem can be spli ino wo phases: a firs phase in which aciviy declines sharply (all he componens of demand conrac) hen rebounds (bu his rebound remains parial and fragile because invesmen does no really pick up), followed by a second more diffuse phase in which aciviy deerioraes again bu on a lesser scale han in he firs phase. A he end of his second phase a more robus and lasing upurn emerges, accompanied by a noable recovery of invesmen by non-financial enerprises. Corporae invesmen, a very cyclical componen of demand, amplifies he shor-erm flucuaions in value-added according o he acceleraor principle. In he recession phase, he drop in invesmen is larger han ha in demand. In he upurn phase invesmen rebounds, in response o boh he pas over-adjusmen and he anicipaed improvemen in demand. The las hree recessive episodes o have hi he French economy show ha corporae invesmen ends o adjus o variaions in demand wih a ime lag, o he exen ha he upurn in invesmen comes laer han ha in value-added. Hence invesmen has rarely been a driver of recovery in France. Oher componens of demand like expors have genuinely driven he recovery phases. The fac ha invesmen is more of a follower han a driver of he cycle may be due o he fac ha he invesmen decision is a serious one for he person who makes i: i involves insallaion coss (and someimes raining, organisaion and adapaion coss), risk-aking in an uncerain conex, an ofen large financial underaking in respec o he lender (bank, shareholders...), and i is irreversible. All hese consraining facors make invesmen a variable ha only becomes dynamic once he upurn in aciviy has been confirmed. In he course of he wo complee recessive episodes (i.e. wih he observaion of he wo phases described above), he invesmen rae in he firs phase of recovery remains sluggish or may even coninue o worsen afer he dae of recovery of aciviy (denoed T), before sabilising: in 1993, i sared o rise again wo quarers afer he low poin, bu his rend was quickly inerruped and he invesmen rae fell back once again before sabilising eigh quarers afer he upurn in aciviy (see Graph 1); in 2001, i coninued o fall for almos hree quarers afer he dae of recovery before sabilising a a low level (see Graph 2). In his firs phase, neiher he producion capaciy uilisaion rae nor he margin rae really improved: a bes hey were sable, or coninued o deeriorae. In he second phase, he acceleraion in invesmen was sharp in boh episodes (see Graphs 3 and 4): he invesmen rae grew sharply from he firs quarers following he upurn. In 1997, boh he producion capaciy uilisaion rae and he margin rae improved significanly, while in 2003 hese wo variables remained in a negaive rend. The las known recessive episode ( ) differs from he oher wo: i is remarkable for he unusually quick response by invesmen o he recovery of value-added in he hird quarer of The invesmen rae grew rapidly as early as he firs quarers of recovery, as did he producion capaciy uilisaion rae and he margin rae (see Graph 5). The wo phases of he recession of Phase 1 recovery in quarer Q (Q= 1993Q2) 2 - Phase 2 recovery in quarer Q (Q= 1997Q1) 32 Conjoncure in France

15 Will corporae invesmen ake off again in France in 2014? The wo phases of he pos-inerne bubble slowdown 3 - Phase 1 recovery in quarer Q (Q= 2002Q1) 4 - Phase 2 recovery in quarer Q (Q= 2003Q3) The grea recession in Phase 1 recovery in quarer Q How o read i: for he five graphs above, he hree series have a base of 100 in quarer Q (Q being he firs quarer wih a posiive GDP growh rae afer each period of recession). December

16 Will corporae invesmen ake off again in France in 2014? For 2014, he pace of economic recovery will depend mainly on wha happens wih corporae invesmen. There are hree possible scenarios:"slow down" invesmen, which coninues o fall; "follower" invesmen, which advances, bu only moderaely, in he wake of he recovery, and "driving" invesmen, wih a srong rebound which will inensify he economic recovery. The "follower" invesmen scenario seems he mos likely. The equaion forecass a moderae upswing in invesmen During previous recoveries, invesmen was generally of he «follower» kind Using he scenario from Conjuncure in France, he equaion esimaed in he previous par forecass an upswing in invesmen excluding consrucion over he forecasing period, albei a moderae one (+0.8% hen +0.6% and +0.3%). This dynamism should be governed for he mos par by he acceleraor effec: like GDP, invesmen is likely o rebound in Q4 before slowing. The poiners o a downurn in oulook may be quie disincive, especially because behaviours are less "mechanical" and are more in line wih agens expecaions. To ouline he prospecs for an upurn in invesmen, i would be useful in addiion o consider recoveries over he las weny years (see Box 2). Briefly, here have been hree recessionary phases (1993, 2001, 2008), each one followed by an inerruped upswing, before a more posiive and more long-lasing recovery phase was insalled (1997, 2003, and hence poenially 2013). The following conclusions can be drawn: - The invesmen rae does no usually pick up during he quarers ha follow recovery, in oher words, invesmen increases a bes wih moderaion, like GDP. The only excepion o his rule was he recovery, when he upurn in invesmen was very srong and very much faser han expeced, given is deerminans (see par 2). The idea ha a rebound in invesmen is usually he driving force behind economic recoveries is no borne ou in France. - conrary o wha is commonly believed, a low level of capaciy uilisaion rae (CUR) does no preven invesmen recovery (see Foresier). Indeed, during pas recessions, recovery sysemaically occurred before he CUR picked up, and usually he upurn in he CUR and he invesmen rae were concomian. This was paricularly rue a he end of 2009: a srong recovery in invesmen occurred when he CUR was sill a is low poin. There may be several explanaions for his apparenly counerinuiive resul, which are no necessarily exclusive. Firs, obviously, he CUR is an average: he CUR may be low, bu his does no preven some under-capaciies on occasions. Nex, during recessions, he drop in invesmen is such ha a rebound may be necessary, jus o mainain producive capaciies ne of amorisaion. And as capial is by is very naure much more iner han invesmen, a srong rebound in invesmen can be accompanied by an upurn in CUR. Analysis of pas recessions herefore shows us firsly ha invesmen generally "follows", and secondly ha an upurn in CUR is no a necessary precondiion for invesmen o recover. "Slow down" invesmen for his recovery? Oher facors, which are difficul o quanify, could influence invesmen decisions, such as France s coninuing loss of araciveness, as shown in inernaional rankings, a a ime when he drop in wage coss in counries such as Spain or Ireland is resoring heir araciveness in he eyes of inernaional invesors. These facors do no seem o have come ino play for he momen, since French corporae invesmen appears, as we have seen, o be in line wih is usual deerminans (demand; margin rae; user cos of capial excluding axaion). While we canno exclude he possibiliy ha hey sar o have an effec over he forecasing period, coninuing wih measures in favour of invesmen, such as he 34 Conjoncure in France

17 Will corporae invesmen ake off again in France in 2014? The mos recen daa subsaniae an upswing in invesmen According o he model described here, corporae invesmen should grow a a similar pace o GDP in 2014 naional pac for compeiiveness and employmen, is pulling in he opposie direcion. A all evens, he business endency surveys do no sugges ha invesmen will fall away in he shor erm. The opposie is he case, as he mos recen daa give credence o an upswing in invesmen in he shor erm. From he conclusions in he firs par, corporae invesmen can be broken down ino invesmen in manufacured goods, which have a very cyclical dynamic, invesmen in services, where he dynamic follows more of a rend, and invesmen in consrucion, which also follows cycles, bu hese are in principle disinc from he GDP cycles. Over he recen period, invesmen in manufacured producs has picked up srongly, afer six quarers of marked decline, and now conribues posiively o aciviy (+0.4% expeced year-on-year by he end of 2013, afer -7.4% a he end of 2012). This is a posiive sign for 2014, because his variable usually follows regular cycles. Invesmen in services, on he oher hand, which resised very well during he crisis, was weaker in 2013, bu his weakness is expeced o be emporary (-1.6% expeced year-on-year by he end of 2013, afer +1.9%). Lasly, invesmen in consrucion should fall back less sharply in 2013 (-0.8% expeced, afer -3.3%), bu he housing sars and building permis rends show ha we canno envisage a posiive conribuion in he firs quarer of In addiion, he survey daa are all in agreemen on an improvemen in he shor erm in invesmen prospecs, even hough a posiive conribuion across 2014 is no a cerainy: according o he indusrial invesmen survey, expendiure on invesmen is likely o fall by 2% in However, by inerpreing hese resuls as a rend, which is more reasonable given he imprecision inheren in surveys, his is a significan improvemen, as he same business leaders assessed he drop in heir invesmens in 2013 a -7%. In services, he survey is qualiaive, and quesions on prospecs for invesmen only cover he nex hree monhs. However, he average oal in he second half of 2013 was 5 poins higher han he average in he firs half of Overall, for he forecas in his Conjoncure in France, i was decided o follow he economeric equaion simulaions (see par 2). Firs, he level of invesmen simulaed in he equaion corresponds oday o he level of invesmen observed. Second, he equaion forecas for he fourh quarer of 2013 is consisen wih wha he raings announce, based on he survey daa, and finally, he facors menioned earlier (uncerainy abou he fuure of he Eurozone, credi condiions ighening), which do no appear as explanaory variables in he equaion, seem o be much less significan oday han hey were in 2011 or 2012, which is no encouragemen o use a lower forecas han ha in he equaion. Corporae invesmen seems se o increase moderaely for he nex hree quarers (+0.7%, +0.2% and +0.2% are he forecass), which would represen an overhang mid-2014 of +0.7% (same as for GDP). Invesmen dynamics should be very diverse, however, spread over invesmen in manufacured producs, which is relaively dynamic (+2.4% overhang), invesmen in services, virually sable (+0.4% overhang), and invesmen in consrucion, which will coninue o fall (overhang -1.3%), and should herefore limi overall growh in invesmen. December

18 Will corporae invesmen ake off again in France in 2014? Appendix - Esimaion of he invesmen equaion for he Eurozone and Germany I is more complex o esimae an invesmen equaion for he Eurozone han for France, because of he availabiliy of daa. Firs of all, he esimaion period is necessarily shorer because he daa sar in 1995 (alhough hey acually sared earlier, he beginning of he 1990s wih he reunificaion of Germany was an aypical period which would disrup esimaions). Nex, he consrucion of a cos of capial, which is fragile for France, would be even more so for he Eurozone, mainly because of he absence of homogenous amorisaion series. Lasly, for he Eurozone, corporae invesmen is no available quarerly and he classificaion is no of producs bu of asses. Therefore he scope in which we do he Eurozone esimaion (invesmen all agens in angible asses excluding consrucion) is similar bu no equivalen o ha of he France esimaion. For hese reasons we seleced wo differen specificaions. The firs is similar o ha used for France, simply replacing he user cos of capial by he price of invesmen. As his specificaion may suffer from an omied variable bias, we consolidae our resuls by means of a second model of he simple acceleraor ype. In he long run, invesmen in value adjuss o value-added wih uni elasiciy, i.e. a arge invesmen rae in value which corresponds o a Cobb-Douglas producion funcion. For boh hese specificaions he margin rae is no significan eiher in he long erm or he shor erm. For each specificaion we seleced wo esimaions which are difficul o choose beween and which mainly differ by heir esimaion period. The firs esimaion ends in 2007Q4, which is boh an advanage (he differenial beween observed and simulaed in recen years can hus be inerpreed as a differen pre-crisis behaviour) and a drawback (he esimaion is made over a shorer period). The second esimaion sops in 2010Q4. Compared o he previous esimaion, he resoring force owards he long-erm arge is weaker, so simulaed invesmen is lower since he sar of he crisis. Depending on he specificaion and he esimaion period used, forecas invesmen is beween 0% and 6% higher han invesmen acually observed. Cobb-Douglas specificaion: ΔInI = 025, + 266,. ΔInY 009,. InI 1 InY ( 008, ) ( 045, ) ( 003, ) + 178,. ΔInY + ε ( 047, ) In p p I 1 Y 1 The equaion esimaed over he period 1995Q1-2007Q4 is wrien: ΔInI = 014, + 313,. ΔInY 005,. InI 1 InY ( 006, ) ( 045, ) ( 002, ) + 021,. ΔInI + ε ( 007, ) 1 CES specificaion 1 + In p p I 1 Y 1 The equaion esimaed over he period 1995Q1-2007Q4 is wrien: ΔInI = 024, + 261,. ΔInY 009,. InI InY 1 1 ( 009, ) ( 045, ) ( 003, ) (* ) + 118,. InY Δ 2 + ε ( 060, ) + 075,. In p p I 1 Y 1 The equaion esimaed over he period 1995Q1-2010Q4 is wrien: ΔInI = 018, + 2, 80. ΔInY 006,. InI InY 1 1 ( 008, ) ( 036, ) ( 003, ) (* ) + 126,. InY Δ 1 + ε ( 047, ) + 070,. In p p I 1 Y 1 where : -I is invesmen in asses, plan and ranspor equipmen in volume, - Y is he gross domesic produc of he Eurozone, - p Y I and p he value-added and invesmen deflaors For each model he Ellio-Rohenberg-Sock es rejecs he non-saionariy hypohesis of he long-erm residual a he 5% hreshold, and confirms ha variables I and Y are order one inegraed. Our Eurozone invesmen models indicae ha he zone has been in a siuaion of sligh underinvesmen since This underinvesmen is mainly due o weak invesmen in Germany, as he models presened below demonsrae. Wih German daa he cos of capial does no feaure significanly in he esimaions, so we replace i by he price of invesmen, in he same way as wih he Eurozone esimaions. The long-erm unconsrained esimaion feaures a coefficien of he price raio which is no significanly differen from 1, in oher words he producion funcion would be of he Cobb-Douglas ype. Unlike he overall Eurozone, he models esimaed in his way unil 2007 or 2010 provide an idenical esimaion of he scale of underinvesmen (14%). This is as high as he acceleraor coefficien is relaively low (1.45, agains 2 for France and 3 for he Eurozone), o he exen ha he simulaed value is less affeced by he deerioraion in recen years. The equaion esimaed over he period 1995Q1-2007Q4 is wrien: ΔInI = 016, + 1, 45. ΔInY 008,. InI InY 1 1 ( 009, ) ( 036, ) ( 005, ) (* ) + 013,. InI Δ 1 + ε ( 013, ) + 088,. In p p I 1 Y 1 The equaion esimaed over he period 1995Q1-2010Q4 is wrien: ΔInI = 016, + 145,. ΔInY 008,. InI InY 1 1 ( 009, ) ( 036, ) ( 005, ) (* ) + 02,. ΔInI + ( 010, ) 1 ε + 106,. In p p I 1 Y 1 36 Conjoncure in France

19 Will corporae invesmen ake off again in France in 2014? GFCF in acive equipmen and maerials ranspor: Eurozone GFCF in ranspor equipmen and maerials: Germany December

20 Will corporae invesmen ake off again in France in 2014? Bibliography Bardaji J., Clavel L., Clémen M., Bessone A-J., Ourliac B., Pluyaud B. e Sorbe S., 2006, «Invesissemen des enreprisesenfranceeenzoneeuro:analogiesedifférencesaveclecycleprécéden»,noe de Conjoncure, Insee, décembre 2006, p Bardaji J., Loubens A. e Parouche H., 2010, «La maquee de prévision Opale 2010», Documen de Travail de la DG Trésor, décembre 2010, p Cabannes P-Y., Coe V., Dubois Y., Lelarge C. e Sicsic M., 2013, «Les ajusemens des enreprises françaises pendan la crise 2008/2009», L Économie Française, Insee Référence, Chion E., Corbel P. e Passeron V., 2003, «Invesissemen des enreprises : le creux es-il passé?», Noe de Conjoncure, Insee, juin 2003, p Commissaria Général à l Invesissemen, 2013, «Rappor annuel relaif à la mise en œuvre du programme d invesissemens d avenir de », juille Cour des Compes, 2013, «L évoluion e les condiions de maîrise du crédi d impô en faveur de la recherche», Communicaion à la Commission des finances de l Assemblée Naionale, juille Davis S. J. e Haliwanger J., 1990, "Gross Job Creaion and Desrucion Microeconomic Evidence and Macroeconomic Implicaions", Macroeconomics Annual, Vol. 5, janvier 1990, p Ellio G., Rohenberg T. J. e Sock J. H., 1996, "Efficien Tess for an Auoregressive Uni Roo", Economerica, vol. 64, n 4, juille 1996, p Eudeline J.F, Sklénard G e Zakharchouk A., 2012, «L indusrie manufacurière en France depuis 2008 : quelles rupures?», Noe de conjoncure, Insee, décembre 2012, p Foresier M., 2011, «Commen expliquer la reprise de l invesissemen en France malgré la faiblesse du aux d uilisaion des capaciés de producion?», Trésor-Eco, n 90, juille Goldman Sachs Global Economics, 2012, "Uncerainy weighing on invesmen spending in Germany", ocobre Guinouard F., Kremp E. e Randriamisaina M., 2013, «Accès au crédi des PME e ETI : fléchissemen de l offre ou moindre demande?», Bullein de la Banque de France, n 192, 2 e rimesre Johansen S., 1991, "Esimaion and Hypohesis Tesing of Coinegraion Vecors in Gaussian Vecor Auoregressive Models", Economerica, vol. 59, n 6, novembre 1991, p Kergueris J.,2002, «Les déerminans de l invesissemen», Rappor du Séna, ocobre Kremp E. e Sevesre P., 2011, "Did he crisis induce credi raioning for French SMEs?", Documen de ravail 405, Banque de France, ocobre OCDE, 2012, «Éudes économiques de l OCDE Allemagne», février, Shin Y., 1994, "A Residual Based Tes of he Null Coinegraion Agains he Alernaive Noncoinegraion", Economeric Theory, Vol. 10, 1994, p SockJ.H.eWasonM.W., 1993, "A Simple Esimaor of Coinegraing Vecors in Higher Order Inegraed Sysems", Economerica, vol. 61, n 4, juille 1993, p Conjoncure in France