UK firms are still reluctant to invest. Official figures next week are likely to show that business investment more or less flatlined in the fourth quarter. This continues a long-term trend; the volume of business investment has risen by an average of only 1.2 per cent per year over the past 16 years. Instead, firms have been piling up cash: in the past 16 years, their sterling bank deposits have risen 4.2 per cent per year in real terms.
This is not a local quirk. Economists at the Minneapolis Fed show that companies around the world have stepped up their savings - so much so that firms now save more than households. As part of this, corporate cash holdings have risen in many countries: Apple alone has $246bn of cash.
For American firms such as Apple, these cash holdings are due in part to one of the many oddities of the US tax system: if a company brings cash into the US it becomes liable for corporation tax, so firms prefer to hold cash overseas. This, however, doesn't explain the UK and global trends towards more corporate cash. Instead, there are five other explanations:
Cushions: Companies used to hold inventories to cushion themselves against changes in demand: if demand rose, they'd run down inventories and if it fell they'd build them up. Now, they tend to use cash instead.
Risk: Company-specific uncertainty might have increased in recent years - I say might, because this is difficult to measure. Greater uncertainty justifies bigger cash holdings. One under-appreciated way in which this is the case is that cash offers protection against "disruption" from new entrants: if an incumbent firm has big cash piles, it can simply take over smaller potential rivals. (It might make sense to consider some cash-rich firms as being, in part, venture capital firms).
Intangibles: Intangible assets can't be used as collateral against loans, so firms need cash instead. If your investment consists of buying a machine, you can use that machine as collateral against the loan. If, however, it consists research and development spending you cannot post collateral. Hence, the need for cash.
Platforms: Many new businesses are platforms - things which bring together buyers and sellers: not just firms like Uber but games consoles and mobile phones. As David Evans and Richard Schmalensee show, these types of businesses are expensive to set up as they can burn lots of cash before attaining critical mass - if they ever do so. Any firm thinking of starting such a business thus needs cash.
Agency: Cash is attractive to managers of publicly-quoted firms, as it helps free them from shareholder oversight: if a firm needs to raise finance for every investment, it'll face tough questions from its backers, whereas if it has lots of cash its managers have more autonomy and a quieter life.
It's difficult to see why these five motives will greatly weaken any time soon. Allied to the powerful secular reasons not to invest (such as the fear of being undercut by future better technologies and the fact that firms have woken up to the fact that many past innovative investments haven't paid), all this suggests that firms will continue to hoard cash.
Those of you who are frustrated by firms' reluctance to use cash to either pay dividends or expand their operations might, therefore, have to live with that frustration.
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Chris blogs at http://stumblingandmumbling.typepad.com