This is the second edition of the OECD Business and Finance Outlook, an annual publication that presents unique data and analysis that looks at what might affect and change, both favourably and unfavourably, tomorrow’s world of business, finance and investment. This year’s edition focuses on “doing business in a fragmented world”. Using analysis from a wide range of perspectives, the report addresses past over-investment in certain industrial sectors, the reversal of the commodity supercycle and the implications of low interest rates for corporate and institutional investors. It provides a new look at large observed differences in productivity performance across firms and at the profitability of clean energy projects. Different aspects of the business environment are addressed, including fiscal incentives for R&D innovation; foreign bribery regimes; and investment treaties. The publication also analyses life expectancy around retirement age across different socio-economic groups and its implications for both social justice and the sustainability of pension systems.

More than seven years have passed since the onset of the global crisis and the global economy has yet to recover its pre-crisis levels of growth. Two major headwinds pose serious challenges: the sluggishness of the growth of investment; and issues relating to the re-regulation of banks and non-performing loans which still persist in many regions. The implementation of structural reforms is paramount in dealing with these challenges and ultimately realigning the global policy and business environments.

The theme of this year’s OECDBusiness and Finance Outlook is fragmentation: the inconsistent structures, policies, rules, laws and industry practices that appear to be blocking business efficiency and productivity growth. It manifests itself at all levels of the global economy, from the global macro-economy to sectoral and micro-economic issues to legal ones.

It is seven years since the global crisis and despite easy monetary policy, financial regulatory reform, and G20 resolutions favouring structural measures, the world economy is not making a lot of progress. Indeed, responses to the crisis seem mainly to have stopped banks from failing and then pushed the many aspects of the crisis around between regions – currently taking the form of excess capacity in emerging markets. Productivity growth raises income per head, allows companies to pay better wages and raises demand to help eliminate excess capacity and improve employment. However, this element is missing in the global corporate sector. The theme of this year’s Business and Finance Outlook is fragmentation: the inconsistent structures, policies, rules, laws and industry practices that appear to be blocking business efficiency and productivity growth.

The global economy is caught between two major headwinds: the reversal of the investment-heavy commodity supercycle; and the “L-shaped” recovery in advanced economies caused by the aftermath of the financial crisis and the interaction of re‐regulation with low and negative interest rates. The zero and even negative time value given to money is having perverse effects. Investors are being herded into concentrated and less liquid positions which work against long-term value creation and productivity growth. Normalisation of interest rates and a sustainable recovery of asset prices is shown to depend on which global scenario emerges: an “inflation first” set of policies favoured by central banks, and avoidance of a “creative destruction” phase to deal with over-investment and excess capacity in certain sectors and countries; or “productivity first” policies that bring about structural adjustment more quickly. The scenario most likely to emerge is one of continued monetary ease and choppy and sometimes volatile markets. Equities are least overvalued but cannot rise sustainably on monetary policy alone. Longer-run negative valuation adjustments are implied for some of the other most severely overvalued asset classes.

One of the puzzles of the post-crisis period is low observed aggregate productivity growth. This chapter dissects the problem using the company and sector value-added data of more than 11 000 of the world’s largest listed non-financial and non-real-estate companies, taken from 20 different industry sectors of the Global Industry Classification Standard. The contribution to productivity growth of these companies is very narrowly based within each sector. This chapter explores why productivity growth is fragmented, i.e. highly varied across enterprises. It considers what distinguishes “more” from “less” productive companies and examines the effect of different company financial decisions with respect to capital expenditure, sales, dividend and buy-back policies, research and development expensing, debt-versus-equity, and merger and acquisition activity.

Public policy has an important role to play in promoting research and development (R&D) and the development, diffusion, and use of new knowledge and innovations. Fiscal incentives, including tax policies, should be directed at specific barriers, impediments or synergies to facilitate the desired level of investment in R&D and innovations. Without careful design, policies can have unintended consequences such as favouring incumbent firms, encouraging small firms to undertake less efficient activities, or creating arbitrage and rent-seeking activity. R&D tax policy needs to be considered in the context of the country’s general tax policies, its broader innovation policy mix and its other R&D support policies. More R&D activity in one country does not necessarily result in an overall increase in global innovation if it is simply shifted from another country. More research is needed to determine the extent to which R&D fiscal incentives in one country increase overall R&D, the quality of that R&D, and its positive spillovers to other sectors of the economy and other countries.

This chapter provides an overview of structural changes in the stock exchange industry. It provides data on mergers and acquisitions as well as the changes in the aggregate revenue structure of major stock exchanges. It describes the fragmentation of the stock market resulting from an increase in stock exchange-like trading venues, such as alternative trading systems (ATSs) and multilateral trading facilities (MTFs), and a split between dark (non-displayed) and lit (displayed) trading. Based on firm-level data, statistics are provided for the relative distribution of stock trading across different trading venues as well as for different trading characteristics, such as order size, company focus and the total volumes of dark and lit trading. The chapter ends with an overview of recent regulatory initiatives aimed at maintaining market fairness and a level playing field among investors.

This chapter reviews how policy and market fragmentation is constraining financing of, and investment in, renewable electricity projects. Scaling-up investment in renewable electricity is critical for reducing greenhouse gas emissions from the power sector, and is therefore important for implementing the 2015 Paris Agreement on climate change. Despite increasing cost-competitiveness of renewable electricity technologies, overall investment in renewables projects remains constrained by policy and market obstacles. These hinder development of a sufficient pipeline of bankable projects and affect the risk-return profile of renewable electricity projects. This chapter reviews recent trends in renewable electricity investment and financing and identifies policy misalignments and market barriers constraining investment in renewable electricity, with a focus on fragmentation issues.

This chapter provides evidence of the differences in life expectancy around retirement age across different socio-economic groups in selected OECD countries based on measures of education, income and occupation. Evidence shows that higher socio‐economic groups live longer than those in lower socio-economic groups and these differences may be increasing over time. Fragmentation of mortality rates has implications for pensions, annuity markets and public policy. It makes it more challenging for pension funds and insurance companies to manage longevity risk. However, it also presents an opportunity to better tailor retirement solutions to the needs of different segments of society. Policy makers need to be aware of these differences to ensure that rules governing access to pensions and retirement savings do not put those in lower socio-economic groups at a disadvantage.

One of the most basic legal principles is that crime should not pay. Yet this chapter will show that, in many jurisdictions with weak sanctions, foreign bribery may be an attractive investment. In others, foreign bribery is subject to strong penalties, although some of these penalties exist only on paper because they are not backed up by effective enforcement. Only a few countries combine strong sanctions with active enforcement of anti-bribery laws. Thus, this chapter paints a picture of fragmented deterrence across the 41 Parties to the Anti-Bribery Convention. This patchwork of incentives and disincentives for foreign bribery is explored using simulations of “net present value” for “investments in foreign bribery” under assumptions of both certainty and uncertainty. The simulations draw on sanctions data produced by the OECD Working Group on Bribery for each of the 41 Parties to the Anti-Bribery Convention and on the cash flows – including both bribes and benefits – associated with a real-world bribery scenario. They show, in particular, that in many countries having low fines for paying bribery, a company would still be willing to “invest” in a foreign bribery scheme even if it knew in advance that it would be caught and fined at the end of the bribery scenario. This implies that fines for bribery are set too low in many jurisdictions.

Investment treaties are concluded between two or more governments and typically offer covered foreign investors protection for their investments from host government conduct in violation of the treaty such as expropriation without compensation, discrimination or treatment that is not “fair and equitable”. This chapter identifies the unique combination of rules applied under many investment treaties which includes rules about the types of loss recoverable by shareholders covered by treaties and about the availability of damages for covered investors in claims against governments. The chapter considers the incentives created by these rules and how they may affect companies, shareholders, creditors and capital markets. It also considers how those incentives may affect corporate structuring of investment.