Knowledge-based capital (KBC) is a key determinant of long-term productivity growth.
It has been estimated to account for one-fifth to one-third of labour productivity growth in
the market sector of the US and EU economies (Corrado et al., 2013). Investment in KBC can
boost productivity especially strongly in countries close to the technology frontier such as
Germany, which have higher capability to absorb and leverage advanced knowledge.
Business investment growth has been weaker in euro area countries, including in
Germany, than in other high income countries, since 2011 (Figure 1, Panel D). Demand is a
key determinant of business investment (OECD, 2015e), and weak demand conditions in
geographically close export markets, notably in the euro area, are likely to be particularly
damaging to investment, as geographic proximity is a key determinant of trade flows
(e.g. Boulhol and de Serres, 2008).
Episodes of demand weakness, even if temporary, can
have lasting effects on the capital stock if investment decisions are costly to reverse (Dixit,
1992). In addition, uncertainty rose in the euro area, including in Germany, with the
eruption of the euro area crisis (Figure 17), and estimates suggest that higher uncertainty
may have lowered investment in Germany (Federal Ministry for Economic Affairs and
Energy, 2013; Deutsche Bundesbank, 2016a).