Improving host countries’ investment environment: is the national supply side really the right focus?

Abstract

After a brief review of the empirics of investment in Europe, this chapter seeks to accomplish four tasks, thereby focusing on the countries that are members of Economic and Monetary Union (EMU). First, it assesses the validity of the standard view that supply-side inadequacies and rigidities at Member State level are to blame for weak investment performance and that market-oriented structural reforms are the solution. Finding that view wanting, it then considers some reasons why touted supply-side reforms may not have substantial positive effects. Following a review of other explanations for weak investment, the chapter concludes that economic governance reform at EMU level is crucial. This is because stable and balanced demand growth that sustains - but also limits - pressure on the supply side is critical for keeping investment at elevated levels.