Low interest rates, low productivity, low growth? A multi-sector case study of UK-based firms’ funding and investment strategies in the context of loose monetary policy

Low productivity growth in a low interest rate environment is a perennial problem for both UK monetary policy and the UK economy more generally. Through a comparative case study of eight firms across two economic sectors during 2012–6 we identify two shortcomings in the current productivity literature. The first is the importance of the order in which firms make investment and funding decisions. Investment decisions tend to predate questions of firm financing, implying loose monetary policy does not drive investment, but rather facilitates it. Secondly, we emphasise the importance of investment quality for funding choices. External financing such as credit or stock issues is predominantly used to fund expansionary but not productivity focussed investments. This implies monetary policy may have worsened the UK’s productivity problem by facilitating expansionary over productivity enhancing investment strategies. Our findings are broadly consistent with the political economy literature on the UK economy, but we argue that research framed by the ‘growth model’ concept has not successfully illuminated firm-level dynamics, and relies on mainstream macroeconomics to explain low productivity. We therefore argue for a research agenda that moves beyond aggregate measures and incorporates questions about the quality of economic activity.