Firmsí investment decisions in vulnerable Member States

This chapter assesses firm-level patterns in investment in vulnerable Member States. The starting point is the observation that the profitability of firms in tradable sectors has recently been restored relative to those in non-tradable sectors, although it remains low in absolute terms. The study shows that tradable sector firmsí investment, relative to non-tradables, has not yet responded to improved relative profitability. This development could be problematic, since capital reallocation to tradables is desirable to strengthen these countriesí export capacity and to restore their external and internal balances. The analysis further reveals that companies in the tradable sectors of vulnerable Member States invest even less than what these firmsí currently weak fundamentals would suggest. A tradable sector firm operating in a vulnerable Member State invests significantly less than a similar firm operating in a nonvulnerable Member State. The results suggest that low current profitability or high indebtedness alone cannot explain this investment pattern and that tight credit supply conditions could be among the factors causing current underinvestment.