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Updated March 16, 2021
Introduction to U.S. Economy: Business Investment
What Is Business Investment?
reduce investment spending. Alternatively, during a healthy
Business investment is spending by private businesses and
economic expansion, businesses tend to see rising demand
nonprofits on physical capital—long-lasting assets used to
for their products, which leads them to increase investment
produce goods and services. Physical capital is generally
in order to increase production to accommodate the
grouped into three categories: equipment (e.g., machinery
increased demand. Figure 1 illustrates this phenomenon—
or computers), structures (e.g., offices or warehouses), and
both business investment and the investment rate fell in the
intellectual property (e.g., software development or
beginning of the 2007-2009 recession and the recession
research and development).
caused by COVID-19. For more information regarding the
business cycle, see CRS In Focus IF10411, Introduction to
Through investment, businesses can build up their stock of
U.S. Economy: The Business Cycle and Growth, by Lida R.
physical capital, which increases their capacity to produce
Weinstock.
goods and services. For example, when a restaurant
purchases an additional grill, it increases its capacity to
Figure 1. Recent Business Investment Trends
prepare food over any given time period. However, physical
2005-2020
capital tends to become less productive over time due to
wear and tear and must eventually be replaced as it breaks
down, a process known as depreciation. For a firm to
continually increase its stock of physical capital, and
therefore its productive capacity, it must invest in new
physical capital faster than its current physical capital is
depreciating. The same is true for the economy as a whole:
For the economy’s stock of physical capital to increase, the
investment rate must exceed the rate at which physical
capital depreciates.
Economic Considerations
Business investment can affect the economy’s short-term

and long-term growth. In the short term, an increase in
Source: Bureau of Economic Analysis.
business investment directly increases the current level of
Notes: The investment rate is measured as the year-over-year
gross domestic product (GDP), because physical capital is
change in real business investment. Gray bar indicates recession.
itself produced and sold. Business investment is one of the
more volatile components of GDP and tends to fluctuate
Business confidence and future expectations for the
significantly from quarter to quarter.
economy are also expected to influence business
investment. If business owners expect rising sales and
In the long term, a larger physical capital stock increases
improving economic conditions, they are more likely to
the economy’s overall productive capacity, allowing more
invest in their businesses, because they anticipate increased
goods and services to be produced with the same level of
demand for their goods and services. Business confidence
labor and other resources. Long-term economic growth
and future expectations can be unpredictable and difficult to
generally depends on growth in the economy’s productive
influence through public policy.
capacity rather than swings in supply and demand. In turn,
faster economic growth generally translates into faster
Business investment is typically financed through loans and
income growth and improved living standards. For
other debt. As such, interest rates influence business
additional discussion of the long-term drivers of economic
investment decisions by either increasing or decreasing the
growth, see CRS In Focus IF10557, Introduction to U.S.
cost for a business to borrow funds, thus affecting the
Economy: Productivity, by Marc Labonte.
profitability of making additional investments. All else
equal, when the interest rate rises, the cost of investing—
Drivers of Business Investment
the interest the business will pay—rises, resulting in less
The main determinants of business investment are broader
investment overall. This type of interest-sensitive behavior
economic conditions, business confidence and expectations,
is what allows monetary policy to function. The Federal
and long-term interest rates.
Reserve changes the short-term federal funds rate, which in
turn affects other interest rates, in an effort to affect
The business cycle is one of the largest drivers of business
business investment (and interest-sensitive consumer
investment. As a recession occurs, businesses tend to see a
spending). For additional discussion of monetary policy and
decline in demand for their products, which leads them to
the Federal Reserve, see CRS Report RL30354, Monetary
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Introduction to U.S. Economy: Business Investment
Policy and the Federal Reserve: Current Policy and
Figure 2. Historical Business Investment as a Share of
Conditions, by Marc Labonte.
GDP
1948-2020
Saving and Investment
One of the long-term determinants of business investment is
the level of savings available to the economy. When
individuals deposit their savings with financial institutions,
those funds are then available to be loaned out to businesses
to invest. Because of the global nature of the U.S. economy,
firms in the United States have access to savings from
within the United States and from abroad. Thus, interest
rates in the United States are influenced by the supply of
global, in addition to national, savings. A higher supply of
savings results in lower interest rates, and a lower supply of
savings results in higher interest rates, all else equal. As
such, an increase in the supply of savings should lead to an

increase in business investment due to declining interest
Source: Bureau of Economic Analysis.
rates. For additional discussion of the supply of savings, see
Notes: Gray bars indicate recessions.
CRS In Focus IF10963, Introduction to U.S. Economy:
Personal Saving, by Lida R. Weinstock.
COVID-19 and Investment
Business investment decreased during the initial months of
Trends in Business Investment
COVID-19 but has since recovered somewhat. Investment
As shown in Figure 1, business investment declined
did not decrease by as large a percentage as it did during the
sharply during the 2007-2009 recession. Deteriorating
2007-2009 recession. This could be the case for a few
economic conditions during the recession reduced business
reasons. First, in contrast to the 2007-2009 recession,
revenues and confidence. The decline in business
financial markets rebounded very quickly after the initial
investment persisted through the third quarter of 2009
COVID-19 shock and continue to perform well. Second,
despite the Federal Reserve’s previously unprecedented
COVID-19 did not hit all businesses the same. While
move of lowering its benchmark interest rate to zero
certain industries, such as hospitality, were hard-hit by the
beginning in late 2008. Following the 2007-2009 recession,
pandemic, other industries remained unscathed or in some
business investment began rising again, with the year-over-
cases grew. For more information on the industries most
year investment rate peaking around 13% in the first half of
affected by COVID-19, see CRS Insight IN11564, COVID-
2012. This rise in business investment coincided with
19: Employment Across Industries, by Lida R. Weinstock.
historically low interest rates, improving business
confidence, and broadly improving economic conditions.
Foreign Investment
Business investment in the United States is made by both
Business investment began to slow considerably by mid-
domestic and foreign individuals. Foreign investment can
2014, remaining relatively flat between 2014 Q4 and 2016
take the form of investment in U.S. financial assets, which
Q2. This decline in investment coincided with a decline in
indirectly funds business investment, or foreign direct
business confidence as measured by the Organisation for
investment, which directly funds business investment. The
Economic Co-operation and Development (OECD)
United States receives significant foreign direct investment
business confidence index. Beginning in mid-2016,
from abroad, amounting to about $331.2 billion in 2019,
business investment began increasing again, peaking in
according to the Bureau of Economic Analysis. By this
mid-2018. Since this peak, investment slowed though the
measure, the largest foreign investors in 2019 were Japan,
rest of 2018 and 2019. The temporary acceleration in
the United Kingdom, and Canada.
business investment was potentially due to increased
business confidence and changes to the tax code that made
Foreign direct investment in the United States has
physical capital investment more attractive. For further
decreased over the past several years, declining from its
discussion of the effect of the 2017 tax revision, see CRS
post-recession peak of about $439.5 billion in 2015.
Report R45736, The Economic Effects of the 2017 Tax
However, the United States is not alone in experiencing a
Revision: Preliminary Observations, by Jane G. Gravelle
decline in foreign direct investment. According to the
and Donald J. Marples.
OECD, global foreign direct investment declined about
50% in the first half of 2020 compared to the second half of
In general, beginning in the late 1970s, business investment
2019, the lowest half-year level since 2013.
as a percentage of GDP increased and has remained
elevated, increasing from an average of around 10.8%
(Note: This In Focus was originally authored by Jeffrey
between 1948 and 1975 to around 13.0% between 1976 and
Stupak, former CRS Analyst in Macroeconomic Policy.)
2020. As shown in Figure 2, after falling to about 11.3% by
the end of 2009, business investment, as a percentage of
Lida R. Weinstock, Analyst in Macroeconomic Policy
GDP, rose back to pre-recession levels of around 13.5%
and has stayed fairly constant since. Despite the effects of
IF11020
COVID-19, business investment as a percentage of GDP
remained at 13.4% as of October 2020.
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Introduction to U.S. Economy: Business Investment

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