Analyzing the impact of investment spikes on dynamic productivity growth

• Investment spikes cause a dynamic productivity loss in the first year after the spike
• The link between dynamic technical change and investment spikes follows a U-shape pattern
• Dynamic scale inefficiency change is increased in the first and second year after the spike
• The effect of investment spikes on dynamic productivity change differ for size groups

Firm-level data usually show that a large portion of firm-level investment takes place in a few investment episodes. This paper assesses productivity growth and its components in production framework that accounts for the dynamics of capital adjustment and relates this to investment spikes using firm-level data of the Spanish meat processing industry over the period 2000–2010. Using the method of impulse responses by local projections, it is shown that investment spikes produce a significant productivity change loss of 0.7% in the first year after the spike. The worsening of technology is the main cause of the reduction of productivity growth in the first year. Technology then improves in the fifth year as a result of investment spike, resulting in the U-shape pattern of relationship. Scale inefficiency significantly improves by 0.4% and 0.5% in the first and second year after the spike has occurred, respectively. All these effects, however, largely depend on the firms׳ size. In particular, it is shown that the loss of technology in the first year mainly pertains to smallest firms, while larger firms experience a negative impact on the contribution of technical inefficiency change to productivity growth.