Economic growth, especially after the financial crisis of 2008, has been declining in many OECD nations. Declining economic growth has negative effects including a lower rate of productivity growth, stagnating standards of living, increases in income inequality etc. Many economists believe that stagnating fixed business investment is one of the key causes of the observed secular decline in economic growth. Hence, it is important to understand what drives business investment and how we can improve it, thereby, improving the economic growth. Thus, the objective of this thesis which is to understand the determinants of fixed investment that affects economic growth is important not only for policy-makers but also for corporations, shareholders, and workers.

In this thesis, we have analyzed the determinants of stagnating business investment in the European economies of the Netherlands and Germany using an accelerator-type model augmented with variables that measure financial constraints, business environment, labour market and network sectoral regulations. Our results show that fixed business investment as a share of GDP in the Netherlands is mainly affected by demand growth, financial constraints, uncertainty and energy prices. In case of Germany, fixed business investment is mainly affected by unemployment rate, term spreads, energy prices and regulations of the network sectors. We see that while demand is found to be statistically significant in explaining decline in business investment in the Netherlands, it is not found to be statistically significant in case of Germany. We found that business investment can be stimulated by increase in demand, real net profits of the firms, network sector regulations or by a decrease in uncertainty, energy prices, term spreads and unemployment rates considering both the Dutch and German economies. Increase in fixed component of intangible investment or decrease in level of financialization can also help in boosting business investment for these two economies.

Based on the empirical findings and literature, we looked into what lessons we can derive from a policy-making perspective. We believe that expansionary macroeconomic policies can most likely help both the Dutch and German economies to stimulate business investment. Finally, this thesis also addresses various reflections in terms of scope for further research. For instance, inclusion of firm-level variables in empirical analysis or using different measures for robustness checks are some of the aspects that can be reflected upon and used in future research.