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Financialisation and Real Investment in the European Union: Beneficial or Prejudicial Effects?

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  • Ricardo Barradas

Abstract

This article presents an empirical analysis of the relationship between financialisation and real investment for non-financial corporations using panel data composed of 27 European Union countries over 19 years (1995 to 2013). On the one hand, financialisation leads to a rise in financial investments, diverting funds from real investments (‘crowding out’ effect); on the other, pressures from shareholders to intensify financial payments restrict the funds available for new real investments. We estimate an aggregate investment equation with the traditional variables (lagged investment, profitability, debt, cost of capital, corporate savings and output growth) and two further measures of financialisation (financial receipts and financial payments). The findings demonstrate that financialisation has damaged real investment in European Union countries, mainly through the channel of financial payments, either by interest or dividend payments. It is also found that the prejudicial effects of financialisation on investment were more severe in the pre-2007 crisis period. It is concluded that financialisation contributed to a slowdown of real investment by 1 to 8 per cent in the full and pre-crisis period, respectively. During the pre-crisis period, financialisation was the main driver of the slowdown of investment in the European Union.

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  • Ricardo Barradas, 2017. "Financialisation and Real Investment in the European Union: Beneficial or Prejudicial Effects?," Review of Political Economy, Taylor & Francis Journals, vol. 29(3), pages 376-413, July.
    • Handle: RePEc:taf:revpoe:v:29:y:2017:i:3:p:376-413
    DOI: 10.1080/09538259.2017.1348574
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    Cited by:

    1. Nicolas Piluso, 2024. "Tobin's Q and shareholder value: Does “shareholder return” impede investment?," Post-Print hal-04699405, HAL.
    2. Jérôme Creel & Paul Hubert & Fabien Labondance, 2017. "Financialisation Risks and Econmic Performance," Documents de Travail de l'OFCE 2017-21, Observatoire Francais des Conjonctures Economiques (OFCE).
    3. Joel Rabinovich & Niall Reddy, 2024. "Corporate Financialization: A Conceptual Clarification and Critical Review of the Literature," Working Papers PKWP2402, Post Keynesian Economics Society (PKES).
    4. Liu, Xiaoying & Wang, Yujing & Li, Meng & Gao, Haoyu, 2024. "The importance of speed to corporate financial asset holdings: Evidence from high-speed rail," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    5. Tang, Huoqing & Zhang, Chengsi, 2019. "Investment risk, return gap, and financialization of non-listed non-financial firms in China⁎," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    6. repec:spo:wpmain:info:hdl:2441/4712tvppdq9m6q5i7t579thpvf is not listed on IDEAS
    7. Riccardo Pariboni & Walter Paternesi Meloni & Pasquale Tridico, 2020. "When Melius Abundare Is No Longer True: Excessive Financialization and Inequality as Drivers of Stagnation," Review of Political Economy, Taylor & Francis Journals, vol. 32(2), pages 216-242, April.
    8. Ricardo Barradas, 2023. "Why Has Labor Productivity Slowed Down in the Era of Financialization?: Insights from the Post-Keynesians for the European Union Countries," Review of Radical Political Economics, Union for Radical Political Economics, vol. 55(3), pages 390-422, September.
    9. Tristan Auvray & Cédric Durand & Joel Rabinovich & Cecilia Rikap, 2021. "Corporate financialization’s conservation and transformation: from Mark I to Mark II," Review of Evolutionary Political Economy, Springer, vol. 2(3), pages 431-457, December.
    10. Zhang, Chengsi & Zheng, Ning, 2020. "Monetary policy and financial investments of nonfinancial firms: New evidence from China," China Economic Review, Elsevier, vol. 60(C).
    11. repec:hal:cepnwp:hal-03079425 is not listed on IDEAS
    12. Xue, Lixing & Chen, Chong & Wang, Na & Zhang, Lirong, 2023. "Gambling culture and corporate financialization: Evidence from China's welfare lottery sales," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    13. Diogo Correia & Ricardo Barradas, 2021. "Financialisation and the slowdown of labour productivity in Portugal: A Post-Keynesian approach," PSL Quarterly Review, Economia civile, vol. 74(299), pages 325-346.
    14. Zhang, Chengsi & Zheng, Ning, 2020. "The financial investment decision of non-financial firms in China," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    15. Tristan Auvray & Cédric Durand & Joel Rabinovich & Cecilia Rikap, 2020. "Financialization's conservation and transformation: from Mark I to Mark II," Working Papers hal-03079425, HAL.
    16. Mishra, Chandra S., 2022. "Does institutional ownership discourage investment in corporate R&D?," Technological Forecasting and Social Change, Elsevier, vol. 182(C).
    17. Lenore Palladino, 2022. "Economic Policies for Innovative Enterprises: Implementing Multi-Stakeholder Corporate Governance," Review of Radical Political Economics, Union for Radical Political Economics, vol. 54(1), pages 5-25, March.
    18. Reddy, Niall, 2024. "“Downsize And Distribute” Or “Merge And Monopolize”? A Critique Of Corporate Financialization Theories," SocArXiv 2zy5h, Center for Open Science.
    19. Hou, Zheng & Roseta-Palma, Catarina & Ramalho, Joaquim José dos Santos, 2021. "Does directed technological change favor energy? Firm-level evidence from Portugal," Energy Economics, Elsevier, vol. 98(C).
    20. Haiyan Yu & Shan Li & Yiyuan Liu & Qiuping Liu & Yuxin Lu, 2023. "Do International Trade Frictions Influence the Competitiveness of Entity Enterprises? Evidence from the Perspective of Financialization," SAGE Open, , vol. 13(4), pages 21582440231, December.
    21. repec:hal:spmain:info:hdl:2441/4712tvppdq9m6q5i7t579thpvf is not listed on IDEAS

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