Investment is the lifeblood of businesses. It is how they grow, innovate and stay competitive. Yet not all investment is productive. Companies can underinvest in valuable opportunities or overspend on poor ones. The result is inefficiency: wasted capital, missed growth and weaker long-term performance.
Our recent research, Firm complexity and investment inefficiency, sheds light on a subtle but powerful driver of these inefficiencies: corporate complexity. As businesses grow, diversify and expand across markets, they inevitably become more complex. But our evidence shows that rising complexity often undermines a company’s ability to make efficient investment decisions.
It is not just that big entities invest badly; it is the complexity that distorts decisions
This is a warning sign for business leaders. Complexity can creep into organisations slowly, under the guise of growth, diversification or expansion into new products and geographies. This can dilute accountability, blur information flows and make it harder for decision-makers to forecast accurately.
The good news is that complexity is not destiny. By recognising the risks, businesses can take steps to manage it.
Using a comprehensive measure of corporate complexity based on company reports, we found that complex businesses’ investment inefficiency shows up in both directions:
- overinvestment: spending projects that destroy value, such as empire-building acquisitions or unnecessary capacity
- underinvestment: failing to fund high-value opportunities because internal systems make it hard to execute them.
Managers in complex businesses might have more discretion to pursue their own agendas
It is not just that big entities invest badly; rather, it is the complexity of the organisation itself that distorts decisions.
The problems
Our findings highlight three main ways in which complexity erodes investment quality:
- The agency problem. As companies become harder to monitor, shareholders, board members and even senior executives struggle to oversee what is really happening inside the organisation. This gives managers more discretion to pursue their own agendas, which could mean empire building, indulging in pet projects or delaying tough calls.
- The financial constraint problem. Complex organisations are often seen as riskier and harder to evaluate by lenders and investors. This raises their cost of capital and can choke off funding for genuinely valuable investments. While our evidence on this problem is weaker than the others, it remains a real risk in markets where financing conditions are tight.
- The structural problem. Expansion across products, regions and business lines makes coordination harder. Different divisions may pursue conflicting goals, data may not flow smoothly and managers face information overload. The result is weaker forecasting of future cashflows and demand, making it more likely that companies misjudge which projects deserve funding.
The structural problem showed up strongly in our tests; managers at more complex organisations were less accurate in their forecasts, and industries with high uncertainty amplified the problem.
Practical steps
For businesses, the lesson is clear: growth should be managed with an eye on complexity. Diversification, acquisitions and international expansion can create value but only if the organisation stays capable of making clear, disciplined investment decisions.
Here are some practical steps leaders can take:
Simplify reporting lines. Use flat, transparent structures to make it easier to spot inefficiencies. Layers of management should be justified by clear, value-adding functions, not just legacy or hierarchy.
Strengthen governance. Boards should pay close attention to how complexity affects oversight. Audit committees, risk officers and independent directors need to probe whether new business lines or acquisitions are making it harder to track performance.
Invest in information systems. Complexity magnifies the need for high-quality internal data. Integrated reporting, real-time dashboards and clear performance metrics help managers and investors see through the fog.
Encourage challenge from independent voices before committing capital
Foster a culture of accountability. Even in complex businesses, clear responsibility for outcomes matters. Leaders need to establish accountability for managerial investment decisions and ensure that incentive structures promote long-term value creation.
Stress-test investment forecasts. Our evidence shows that forecasting errors grow with complexity. Businesses should test investment proposals under different scenarios and encourage challenge from independent voices before committing capital.
It is important to stress that complexity is not inherently bad. Many successful companies are complex because they operate globally, innovate constantly or manage diverse product portfolios. But the risk is that complexity grows faster than the systems designed to manage it.
Companies that ignore this risk find themselves locked into patterns of wasteful investment or paralysed by indecision. By contrast, those that treat complexity as a strategic challenge can sustain growth without sacrificing efficiency.
Why now?
In an uncertain global economy, businesses face rising pressures: volatile demand, geopolitical shocks, regulatory changes and technological disruption. These forces often push companies to diversify or expand in ways that add layers of complexity.
Our research suggests that without careful management, these moves could backfire – not because growth is bad but because the complexity it generates undermines decision-making.
For boards and executives, the call to action is clear: growth strategies must go hand in hand with complexity management. By simplifying structures, strengthening governance and improving information flows, companies can ensure that every pound of capital is invested where it creates the most value.
Complexity is a silent threat to investment efficiency. Left unmanaged, it clouds information, weakens oversight and undermines strategic choices. But with foresight and discipline, businesses can keep complexity under control and turn growth into lasting value.
