Introduction to U.S. Economy: Business Investment
link to page 1 
Updated December 29, 2022
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
Q1 2005-Q3 2022
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
business investment directly increases the current level of
Source: Bureau of Economic Analysis.
gross domestic product (GDP), because physical capital is
Notes: The investment rate is measured as the year-over-year
itself produced and sold. Business investment is one of the
change in real business investment. Gray bar indicates recession.
more volatile components of GDP and tends to fluctuate
significantly from quarter to quarter.
Business confidence and future expectations for the
economy are also expected to influence business
In the long term, a larger physical capital stock increases
investment. If business owners expect rising sales and
the economy’s overall productive capacity, allowing more
improving economic conditions, they are more likely to
goods and services to be produced with the same level of
invest in their businesses, because they anticipate increased
labor and other resources. Long-term economic growth
demand for their goods and services. Business confidence
generally depends on growth in the economy’s productive
and future expectations can be unpredictable and difficult to
capacity rather than swings in supply and demand. In turn,
influence through public policy.
faster economic growth generally translates into faster
income growth and improved living standards. For
Business investment is typically financed through loans and
additional discussion of the long-term drivers of economic
other debt. As such, interest rates influence business
growth, see CRS In Focus IF10557, Introduction to U.S.
investment decisions by either increasing or decreasing the
Economy: Productivity, by Lida R. Weinstock.
cost for a business to borrow funds, thus affecting the
profitability of making additional investments. All else
Drivers of Business Investment
equal, when the interest rate rises, the cost of investing—
The main determinants of business investment are broader
the interest the business will pay—rises, resulting in less
economic conditions, business confidence and expectations,
investment overall. This type of interest-sensitive behavior
and long-term interest rates.
is what allows monetary policy to function. The Federal
Reserve changes the short-term federal funds rate, which in
The business cycle is one of the largest drivers of business
turn affects other interest rates, in an effort to affect
investment. As a recession occurs, businesses tend to see a
business investment (and interest-sensitive consumer
decline in demand for their products, which leads them to
spending). For additional discussion of monetary policy and
https://crsreports.congress.gov
link to page 1 link to page 2
Introduction to U.S. Economy: Business Investment
the Federal Reserve, see CRS Report RL30354, Monetary
remained unscathed or in some cases grew. Third, the
Policy and the Federal Reserve: Current Policy and
economy recovered much more quickly in the wake of the
Conditions, by Marc Labonte.
2020 recession than after the 2007-2009 recession.
Saving and Investment
While generally volatile and closely correlated to the
One of the long-term determinants of business investment is
business cycle, business investment as a percentage of GDP
the level of savings available to the economy. When
has averaged about 13% and remained in a band of between
individuals deposit their savings with financial institutions,
11% and 15% for about the past 40 years. As shown in
those funds are then available to be loaned out to businesses
Figure 2, after falling to about 11.3% by the end of 2009,
to invest. Because of the global nature of the U.S. economy,
this measure rose back to pre-recession levels and has
firms in the United States have access to savings from
stayed fairly constant since. Despite the effects of COVID-
within the United States and from abroad. Thus, interest
19, business investment as a percentage of GDP remained
rates in the United States are influenced by the supply of
relatively steady and, at 13.2% as of October 2022, is
global, in addition to national, savings. A higher supply of
similar to 2019 levels.
savings results in lower interest rates, and a lower supply of
savings results in higher interest rates, all else equal. As
Figure 2. Historical Business Investment as a Share of
such, an increase in the supply of savings should lead to an
GDP
increase in business investment due to declining interest
Q1 1948-Q3 2022
rates. For additional discussion of the supply of savings, see
CRS In Focus IF10963, Introduction to U.S. Economy:
Personal Saving, by Lida R. Weinstock.
Trends in Business Investment
As shown in Figure 1, business investment declined
sharply during the 2007-2009 recession. Deteriorating
economic conditions during the recession reduced business
revenues and confidence. The decline in business
investment persisted through the third quarter of 2009
despite the Federal Reserve’s previously unprecedented
move of lowering its benchmark interest rate to zero
beginning in late 2008. Following the 2007-2009 recession,
business investment began rising again, with the year-over-
year investment rate peaking around 13% in the first half of
Source: Bureau of Economic Analysis.
2012. This rise in business investment coincided with
Notes: Gray bars indicate recessions.
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.
Economic Co-operation and Development (OECD)
According to the Bureau of Economic Analysis, the United
business confidence index. Beginning in mid-2016,
States receives significant foreign direct investment from
business investment began increasing again, peaking in
abroad. The foreign direct investment in the United States
mid-2018. Since this peak, investment slowed though the
position increased by $506.1 billion in 2021, resulting in a
rest of 2018 and 2019. The temporary acceleration in
total stock of $4.98 trillion. By country of the foreign
business investment was potentially due to increased
parent, the top five foreign investors in 2021 were Japan,
business confidence and changes to the tax code that made
the Netherlands, Canada, the United Kingdom, and
physical capital investment more attractive. For further
Germany.
discussion of the effect of the 2017 tax revision, see CRS
Report R45736, The Economic Effects of the 2017 Tax
The United States also invests in foreign businesses. In
Revision: Preliminary Observations, by Jane G. Gravelle
2021, the U.S. direct investment abroad position increased
and Donald J. Marples.
by $403.3 billion to a total stock of $6.49 trillion. Direct
investment abroad in 2021 was largest in the United
Business investment decreased during the initial months of
Kingdom, the Netherlands, Luxembourg, Ireland, and
COVID-19 but has since recovered somewhat. In dollar
Canada.
terms, investment did not decrease by as large a percentage
as it did during the 2007-2009 recession. This could be the
(Note: This In Focus was originally authored by Jeffrey
case for a few reasons. First, in contrast to the 2007-2009
Stupak, former CRS Analyst in Macroeconomic Policy.)
recession, financial markets rebounded very quickly after
the initial COVID-19 shock. Second, COVID-19 did not hit
Lida R. Weinstock, Analyst Macroeconomic Policy
all businesses the same. While certain industries, such as
hospitality, were hit hard by the pandemic, other industries
IF11020
https://crsreports.congress.gov
Introduction to U.S. Economy: Business Investment
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11020 · VERSION 8 · UPDATED
Updated December 29, 2022
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
Q1 2005-Q3 2022
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
business investment directly increases the current level of
Source: Bureau of Economic Analysis.
gross domestic product (GDP), because physical capital is
Notes: The investment rate is measured as the year-over-year
itself produced and sold. Business investment is one of the
change in real business investment. Gray bar indicates recession.
more volatile components of GDP and tends to fluctuate
significantly from quarter to quarter.
Business confidence and future expectations for the
economy are also expected to influence business
In the long term, a larger physical capital stock increases
investment. If business owners expect rising sales and
the economy’s overall productive capacity, allowing more
improving economic conditions, they are more likely to
goods and services to be produced with the same level of
invest in their businesses, because they anticipate increased
labor and other resources. Long-term economic growth
demand for their goods and services. Business confidence
generally depends on growth in the economy’s productive
and future expectations can be unpredictable and difficult to
capacity rather than swings in supply and demand. In turn,
influence through public policy.
faster economic growth generally translates into faster
income growth and improved living standards. For
Business investment is typically financed through loans and
additional discussion of the long-term drivers of economic
other debt. As such, interest rates influence business
growth, see CRS In Focus IF10557, Introduction to U.S.
investment decisions by either increasing or decreasing the
Economy: Productivity, by Lida R. Weinstock.
cost for a business to borrow funds, thus affecting the
profitability of making additional investments. All else
Drivers of Business Investment
equal, when the interest rate rises, the cost of investing—
The main determinants of business investment are broader
the interest the business will pay—rises, resulting in less
economic conditions, business confidence and expectations,
investment overall. This type of interest-sensitive behavior
and long-term interest rates.
is what allows monetary policy to function. The Federal
Reserve changes the short-term federal funds rate, which in
The business cycle is one of the largest drivers of business
turn affects other interest rates, in an effort to affect
investment. As a recession occurs, businesses tend to see a
business investment (and interest-sensitive consumer
decline in demand for their products, which leads them to
spending). For additional discussion of monetary policy and
https://crsreports.congress.gov
link to page 1 link to page 2
Introduction to U.S. Economy: Business Investment
the Federal Reserve, see CRS Report RL30354, Monetary
remained unscathed or in some cases grew. Third, the
Policy and the Federal Reserve: Current Policy and
economy recovered much more quickly in the wake of the
Conditions, by Marc Labonte.
2020 recession than after the 2007-2009 recession.
Saving and Investment
While generally volatile and closely correlated to the
One of the long-term determinants of business investment is
business cycle, business investment as a percentage of GDP
the level of savings available to the economy. When
has averaged about 13% and remained in a band of between
individuals deposit their savings with financial institutions,
11% and 15% for about the past 40 years. As shown in
those funds are then available to be loaned out to businesses
Figure 2, after falling to about 11.3% by the end of 2009,
to invest. Because of the global nature of the U.S. economy,
this measure rose back to pre-recession levels and has
firms in the United States have access to savings from
stayed fairly constant since. Despite the effects of COVID-
within the United States and from abroad. Thus, interest
19, business investment as a percentage of GDP remained
rates in the United States are influenced by the supply of
relatively steady and, at 13.2% as of October 2022, is
global, in addition to national, savings. A higher supply of
similar to 2019 levels.
savings results in lower interest rates, and a lower supply of
savings results in higher interest rates, all else equal. As
Figure 2. Historical Business Investment as a Share of
such, an increase in the supply of savings should lead to an
GDP
increase in business investment due to declining interest
Q1 1948-Q3 2022
rates. For additional discussion of the supply of savings, see
CRS In Focus IF10963, Introduction to U.S. Economy:
Personal Saving, by Lida R. Weinstock.
Trends in Business Investment
As shown in Figure 1, business investment declined
sharply during the 2007-2009 recession. Deteriorating
economic conditions during the recession reduced business
revenues and confidence. The decline in business
investment persisted through the third quarter of 2009
despite the Federal Reserve’s previously unprecedented
move of lowering its benchmark interest rate to zero
beginning in late 2008. Following the 2007-2009 recession,
business investment began rising again, with the year-over-
year investment rate peaking around 13% in the first half of
Source: Bureau of Economic Analysis.
2012. This rise in business investment coincided with
Notes: Gray bars indicate recessions.
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.
Economic Co-operation and Development (OECD)
According to the Bureau of Economic Analysis, the United
business confidence index. Beginning in mid-2016,
States receives significant foreign direct investment from
business investment began increasing again, peaking in
abroad. The foreign direct investment in the United States
mid-2018. Since this peak, investment slowed though the
position increased by $506.1 billion in 2021, resulting in a
rest of 2018 and 2019. The temporary acceleration in
total stock of $4.98 trillion. By country of the foreign
business investment was potentially due to increased
parent, the top five foreign investors in 2021 were Japan,
business confidence and changes to the tax code that made
the Netherlands, Canada, the United Kingdom, and
physical capital investment more attractive. For further
Germany.
discussion of the effect of the 2017 tax revision, see CRS
Report R45736, The Economic Effects of the 2017 Tax
The United States also invests in foreign businesses. In
Revision: Preliminary Observations, by Jane G. Gravelle
2021, the U.S. direct investment abroad position increased
and Donald J. Marples.
by $403.3 billion to a total stock of $6.49 trillion. Direct
investment abroad in 2021 was largest in the United
Business investment decreased during the initial months of
Kingdom, the Netherlands, Luxembourg, Ireland, and
COVID-19 but has since recovered somewhat. In dollar
Canada.
terms, investment did not decrease by as large a percentage
as it did during the 2007-2009 recession. This could be the
(Note: This In Focus was originally authored by Jeffrey
case for a few reasons. First, in contrast to the 2007-2009
Stupak, former CRS Analyst in Macroeconomic Policy.)
recession, financial markets rebounded very quickly after
the initial COVID-19 shock. Second, COVID-19 did not hit
Lida R. Weinstock, Analyst Macroeconomic Policy
all businesses the same. While certain industries, such as
hospitality, were hit hard by the pandemic, other industries
IF11020
https://crsreports.congress.gov
Introduction to U.S. Economy: Business Investment
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11020 · VERSION 8 · UPDATED