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Returning to Investment

Conventional wisdom holds that household savings will flow to companies that can best put the money to productive use. But in many developing countries, easier access to finance has not led to more financing for long-term investments, because corporations are using profits to please their shareholders by increasing dividends.

GENEVA – At the G20 summit last month in Hangzhou, China, world leaders outlined an ambitious plan for a “new era of global growth.” But they left out a key ingredient: fixing the investment climate.

Conventional wisdom holds that, through efficient financial markets, household savings will flow to companies that can best put the money to productive use. But in many developing countries, easier access to finance – owing to unrestricted cross-border capital flows and financial-market deregulation – still has not led to more financing for long-term investments, particularly in manufacturing.

Investment decisions depend on a variety of complex factors and contingencies, and a mix of public and private finance is crucial for bringing new projects to fruition. In East Asia, which has experienced rapid growth and development in recent years, policymakers have not only allowed, but encouraged, higher corporate profits, so long as they are channeled into productive investments. As a result, as much as four-fifths of large East Asian companies’ investment spending is funded from retained earnings, while publicly owned financial institutions have helped maintain the pace of investment-led growth.

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