An Econometric Analysis of the Determinants of Capacity Expansion Investment in the West European Chemical Industry

Abstract

Capacity expansion investments by oligopolistic firms is arguably one of their most important strategic decisions. It may have significant impli- cations on the firms themselves as well as on their existing and potential competitors, the industry and the economy as a whole. Accordingly, it is no surprise that the determinants of such invest- ments has been a most popular issue in industrial organization (TO) theory. Given the complexity of real life, it is unlikely, however, that answers of general applicability can be provided to this ques- tion. This necessitates empirical work which has not been forthcoming. Our objective in this paper is to fill this gap by providing an econometric analysis of the determinants of capacity expansion investments in a real-life case, the West Euro- pean chemical industry. The paper is divided into six sections. The next section discusses the theory underlying investment decisions in general and capacity expansion investments in particular. The third section introduces the case under considera- tion. The fourth section has a discussion of the data and variables used in the study. The fifth section discusses our results and conclusions are presented in the final section.