Firms' investment and capacity utilisation: the role of financial constraints and uncertainty

This paper investigates how capacity utilisation is associated with investment behaviour in Italian manufacturing firms, examining the interplay between firms' operational positioning, uncertainty, and financial constraints. Using firm-level data from the Bank of Italy's Survey of Industrial and Service Firms (2002-2024), we test whether firms operating above sector-specific capacity targets, or "at the growth window", exhibit different investment patterns than those operating below capacity. Our findings reveal that firms in the growth window demonstrate significantly higher investment rates and a higher probability of expansion investments. However, this response varies systematically by firm size, with medium and large firms driving the results while smaller firms show limited responsiveness to capacity triggers. Most notably, we document substantial heterogeneity in how uncertainty relates to investment: firms outside the growth window increase investments during uncertain periods, while firms at capacity show reduced sensitivity to uncertainty. This pattern suggests investment inefficiency, in which resources flow toward lower-potential firms during volatile periods while high capacity firms exercise restraint. Financial constraints consistently depress investment across all specifications, with particularly strong effects for firms at critical capacity junctures. These findings have significant implications for industrial policy design: rather than distributing support broadly, policymakers should identify and assist firms at their growth window when expansion opportunities are most salient.