THE INFLUENCE OF UNCERTAINTY ON INVESTMENT IN THE UK: A MACRO OR MICRO PHENOMENON? Paul Temple, * Giovanni Urga ** and Ciaran Driver *** ABSTRACT While the theory examining the relationship between uncertainty and investment has suggested new research avenues, it has not had strong predictive power. Nevertheless, at the policy level the benefits for investment of a more stable economic climate are being emphasised. These considerations point to the need for empirical work. Accordingly, this paper draws on industry level panel data, obtained by marrying the UK Census of Production with the CBI Industrial Trends Survey, and applies dynamic panel data methods to distinguish between macro and micro sources of uncertainty and to consider the role of financial factors. It is found that both sources of uncertainty exert a considerable negative impact on investment, while financial factors may be important in some industries. IINTRODUCTION Weak physical investment has characterised many countries in the European Union in the 1990s. At the same time, economists of a variety of persuasions are increasingly emphasising the causal links running from investment to output. We may mention here not just the endogenous growth theorists, but also those recognising the role played by investment in shaping the international competitiveness of economies and thereby influencing external constraints on growth. Attempts however to influence the rate of investment and capture any favourable spillover effects that may accrue requires an understanding of the determinants of investment. Here theoretical understanding has been enhanced by a new emphasis on the roles of uncertainty, irreversibility, and lumpiness in shaping the investment decision. But theoretical insights have lacked predictive power, and much work remains for empirical analysis. This paper contributes to the empirical picture by estimating investment functions using survey-based information at an industry level. These data are used to explain the rate of investment in UK manufacturing, a sector historically characterised by rates of Scottish Journal of Political Economy, Vol. 48, No. 4, September 2001 # Scottish Economic Society 2001, Published by Blackwell Publishers Ltd, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA 361 *University of Surrey **City University Business School, London ***Imperial College Management School, London