investment growth in EMDEs? Third, what are the factors associated with the investment slowdown, including spillovers from weak activity and investment in major economies? Fourth, what are the implications of weak investment growth for long‐term growth prospects? Fifth, which policies can support investment?

The paper informs the debate on the recent slowdown in investment by making the following contributions _._ First, it focuses on EMDEs, whereas the bulk of the existing literature has focused on AEs. The few existing studies that analyze EMDE investment are either based on pre‐crisis data or confine their analysis narrowly to the 2008‐09 crisis or simply focus on specific regions.<sup>4</sup> Second, it estimates the contributions of a comprehensive set of factors associated with weak investment growth. A number of empirical methods are used to zoom in on specific external and domestic factors. Third, it examines the implications of investment weakness in EMDEs for global trade, long‐term prospects for growth and catch‐ up, and it highlights the potential impact on productivity growth. Fourth, in light of its findings and insights from an extensive literature, the paper provides a wide range of macro‐ and microeconomic policy recommendations to revive investment growth.

The rest of the paper is organized as follows. Section 2 describes the main features of the investment slowdown. Section 3 explores the macroeconomic backdrop behind the slowdown. Section 4 examines the factors associated with the slowdown. Section 5 assesses the implications of weak investment for global trade, long‐term growth, and income catch‐up. Section 6 discusses policies to promote investment growth. Section 7 concludes.

# **2. Main features of the investment slowdown**

During 2003‐08, EMDE investment growth reached historic highs averaging 12 percent a year, more than twice the long‐term average growth rate of 5 percent (Figure 2). The investment boom was particularly pronounced in commodity exporters, where soaring commodity prices encouraged investment in resource exploration and development and, in anticipation of higher future incomes, in non‐resource projects (World Bank 2016a). Some of this elevated pre‐crisis investment fueled activity in nontradables sectors (e.g., real estate) or in sectors whose growth prospects have dimmed considerably (e.g., mining). Since 2010, however, EMDE investment growth has slowed steadily from 10 percent in 2010 to 3.4 percent in 2015. By 2014, it was not only well below its double‐digit pre‐crisis average rates but also below its long‐term average over 1990‐2008.

The investment slowdown has been broad‐based. It has been more sustained in EMDEs than in AEs and more pronounced than in periods following earlier global downturns. The slowdown has been visible in both private and public components of investment. Repeated downgrades to consensus forecasts for investment growth suggest a gradual recognition of its likely persistence.

**Unusually weak.** Investment growth remains more anemic—and its weakness has been more persistent— than in the aftermath of previous global recessions and slowdowns (Figure 3). From an unusually strong rebound in 2010, investment growth in EMDE commodity exporters has now slowed well below growth rates observed after previous global recessions and slowdowns.

> 4 These include Anand and Tulin (2014); Caselli, Pagano, and Schivardi (2003); Qureshi, Diaz‐Sanchez, and Varoudakis (2015); Bahal, Raissi, and Tulin (2015); and Cerra et al. (2016). Firm‐level studies include Magud and Sosa (2015) and Li, Magud, and Valencia (2015).

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