The survey suggests that while there has been underinvestment and while financial constraints appear to have played a role, other financial and non-financial constraints like crowding out, uncertainty and risk aversion have probably been equally important. Unfortunately there seems to be no silver bullet. The survey suggests that any policy initiative to address underinvestment would need to address a wider agenda than just constraints on external financing. Rates of return  I have concentrated so far on the firms who believe they had invested too little and the reasons they gave for this underinvestment. The survey however also shed light on the approach used by all firms to decide whether to take an investment opportunity. The results reinforce other evidence that suggests that investment projects may now face a stiffer test than pre-crisis because firms are implicitly applying a higher risk premium in their decision making. The survey asked firms about the average rates of return on the investments they had made over the past five years and how they assessed investment opportunities. The responses indicate that the rate of return on past investments has averaged 12%. This is squarely in line with the top down ONS estimate of the annual net return on capital in the private non-financial corporate sector as a whole – an estimate that has been remarkably stable at around 12% since the turn of the century.
There are probably several reasons why they have not. As noted earlier, inertia has probably played a role – the survey results suggest that firms adjust their investment targets infrequently and change them slowly. So it is possible that the sharp decline in real interest rates since the global financial crisis may not yet be reflected in company hurdle rates. Uncertainty and risk aversion may also have played a role. In the survey, these were the predominant nonfinancial obstacles to investment (Chart 5). Of the third of firms who said they had invested too little over the 7  past five years, over 80% cited uncertainty as an obstacle. Other studies have also found that increased uncertainty can lead to weak investment. 8  Chart 5: Obstacles to investment over the past five years  (a)  % of businesses 90  Moderate Obstacle Major Obstacle  80 70 60 50 40 30 20 10 0 Internal funds  External funds  Uncertainty  Risk aversion  Cost of finance  Shorttermism  Skill Shortage  Low/slow returns Source: Bank of  England Finance and Investment Decisions survey. (a) Question 8: ‘If your business invested ‘too little’ over the past five years, what were the main obstacles to investing?’. (b) ‘Short-termism’ arises when companies value short-term returns above investment that typically yields returns once a long-term horizon.