New reports from TPI and ERC explore management decisions on tangible vs intangible investments, and potential impact on UK’s Productivity Gap

Two new reports exploring how UK companies make investment decisions on both tangible and intangible assets explore how the UK’s perceived ‘Productivity Gap’ - the difference in productivity between UK companies and those in other countries - could be being affected by the switch to intangible assets as drivers of company value.

Both reports were covered in a recent episode of The Productivity Institute’s podcast, Productivity Puzzles, and in a TPI blog post, British firms’ investment behaviour is informal and cautious.

The first report, Understanding productive investment decisions: Investment patterns and decision-making processes, by Eugenie Golubova and Stephen Roper for The Productivity Institute (PDI) and Enterprise Research Centre (UK), explored whether the UK’s low level of business investment is a reason for the country’s slow productivity growth by examining the drivers of business investment and how companies make their investment decisions.

The researchers analysed responses from 1,623 firms to a ‘Productive Investment Decisions’ survey. Firms involved made investments exceeding £5,000 between 2019 and 2024.

The report covers tangible and intangible investments, “including physical assets such as machinery and equipment, and non-monetary assets such as patents and software.”

A key finding was that firms have similar reasoning for tangible and intangible investments. However, a key difference is financing, as intangible investments are less likely to be funded by external sources.

Less than half of firms had a target rate of return on investment – only 42% of firms making tangible investments and 31% of those making intangible investments.

Firms invested 13% of their turnover in tangible assets and 10% in intangible assets from 2019 to 2024. Internal company funds were the most common source of investment by far, although a significant proportion of firms used external funding for tangible (44%) and intangible investments (30%).

Most investments involved tangible assets, either solely (49%) or in combination with intangible assets (37%).

The researchers observe that the distinction between tangible and intangible investment by UK firms “is crucial for analysing productivity: British firms have not been investing in capital as expected, despite historically low interest rates and a higher rate of return on capital. This is known as the ‘missing investment puzzle,’ which can be explained by intangible investment… There is also evidence that intangible investment enhances productivity… However, measuring intangible investment is more challenging: the UK National Accounts record some, but not all, intangible capital.”

Many experts agree that measuring intangible investment is difficult, as is linking that investment to company productivity, or indeed measuring the value of intangible outputs and their contribution to company financial performance.

The table below breaks down how many of the firms in the survey have invested in tangible and intangible assets, further broken down by asset sub-types (firms could select multiple answers).

Source Understanding productive investment decisions: investment patterns and decision-making processes Used by permission. Copyright TPI and ERC.

The report also flagged differences in intangible investment across the UK’s constituent nations - “the main difference was that English firms were more likely to engage exclusively in intangible investments (13% versus 7% in the rest of the UK), whereas Northern Irish firms invested less in intangibles (including when combined with tangible investments),”

The second report, Ambitious but risk averse, by Tera Allas and Stephen Roper for TPI, analyses how UK managers make investments decisions compared to their counterparts in other countries.

The key finding was that “UK managers are not less ambitious than their counterparts.” However, the authors go on to say, they are more prone than international managers to ‘satisficing’ (making decisions that are ‘good enough’ rather than reaching for the best decisions possible), “consistently more risk and loss averse, and show some evidence of greater ambiguity aversion and short-termism than comparator managers… The result is a distinct UK manager profile: ambitious but risk averse.”

Ambitious but risk averse: UK manager attitudes and the investment gap (Tera Allas CBE and Stephen Roper) is published by The Productivity Institute. Understanding productive investment decisions: investment patterns and decision-making processes (Eugenie Golubova and Stephen Roper) is a joint publication by The Productivity Institute and the Enterprise Research Centre.