Harvard Business Review LogoMost firms get capital allocation wrong. Here’s how to do it right. by Paul Blase and Paul LeinwandRyan Koopmans & Alice WexellOne of the biggest strategic challenges companies face is how much they should invest in growth. Drawing on an analysis of a decade’s worth of performance data on 2,900 U.S. publicBig businesses have an investment problem. While the U.S. GDP grew by an average of 3% annually from 2014 to 2023, largely driven by technological innovation, the annual investment rate of medium to large American corporations declined by a median 16% in that time period. And this pattern is not unique to the United States. A 2025 OECD paper drawing on both national accounts and firm-level data across 17 advanced economies found that real business investment is roughly 23% below its pre-financial-crisis level on a weighted average basis.
How Much Should You Be Investing in Growth?
One of the biggest strategic challenges companies face is how much they should invest in growth. Drawing on an analysis of a decade’s worth of performance data on 2,900 U.S. public companies, the authors have identified an “investment sweet spot,” in which firms balance asset growth and return on assets in ways that maximize valuation multiples. Companies in accelerating, steady growth, and mature industries have different sweet spots, they explain, and firms operating outside their optimal ranges can suffer valuation penalties of 20% to 70%. But effective capital allocation is also about aligning investments with strategic priorities and long-term growth logic. To achieve this, leaders must manage investments as an integrated portfolio, establish clear growth metrics and governance systems, and reward disciplined experimentation and intelligent risk-taking.
U.S. corporations reduced median investment 16% and OECD firms 23% below crisis levels since 2014, despite GDP growth driven by technology. Underinvestment in growth weakens R&D and capabilities, putting firms at risk in innovation-led markets.
