ABSTRACT
Introduction It is possible to construct a series of arguments denying an important role for capital investment in the formulation of economic policy. A robust defence of such a view can be based on diminishing returns to capital, the capturing of productivity gains by ‘insiders’, efficient forward markets for goods and services and an absence of positive externalities. Moreover, even if it were accepted that stimulating investment was a desirable objective, it is far from clear how policy should proceed. Which policy instruments for example are most likely to encourage a change of behaviour and induce additionality? In the UK, general disillusion in this regard with an industry policy which for many years formally targeted fixed investment, may account for some of the reticence of policy-makers to take on board the counter-arguments. In recent years they have preferred, even when paying lip-service to the desirability of investment, to concentrate on what might be called ‘hygiene’ factors. We may include under such a head, a stable macroeconomic climate, a tax regime which favours entrepreneurial endeavour and inward investment, and (a particular favourite of the new Labour administration), an emphasis on human capital formation.
