Determinants of Investment
INTRODUCTION
Industrial sector in India has been undergoing significant changes both in its structure and pattern owing to the policy changes. Since the early 1950s up until the early 1980s the evolution of manufacturing sector was guided by protected industrial and trade policies, which restricted the growth of the economy in general and manufacturing sector, in particular. Under old industrial and trade policy regime, manufacturing sector was characterized by extensive public sector participation, regulation of the private sector firms, restrictions on foreign investment, high tariff and non-tariff restrictions on imports, which held up the growth of the manufacturing sector in India. This has been replaced by a more liberal industrial and trade policy regime, through the inception of new economic policy in 1991. The major focus of these policies had been to dismantle the complex web of controls that severely constrained the emergence and operation of the private entrepreneurs. Investment performance has been a key emphasis in the policy debate following the reforms (Athukorala and Sen 1998). It is observed that new policies have made tremendous effects on the industrial sector, in terms of conducive business environment and future growth process of industries.
Understanding of the behaviour of investment provides an important insight into the process of economic development. The economic growth critically depends on capital accumulation and it stems from investment. The economy's productive capacity can be expanded by investment spending as a dynamic variable, on long life capital goods which embody technical advance. However, recent theoretical and empirical studies on the determinants of investment focused on the role of government policy and tried to derive an explicit relationship between the principal policy instruments and private investment (Blejer and Khan 1984, Greene and villaneuva 1991). More importantly, as evidenced in many research works (1),
Industrial sector in India has been undergoing significant changes both in its structure and pattern owing to the policy changes. Since the early 1950s up until the early 1980s the evolution of manufacturing sector was guided by protected industrial and trade policies, which restricted the growth of the economy in general and manufacturing sector, in particular. Under old industrial and trade policy regime, manufacturing sector was characterized by extensive public sector participation, regulation of the private sector firms, restrictions on foreign investment, high tariff and non-tariff restrictions on imports, which held up the growth of the manufacturing sector in India. This has been replaced by a more liberal industrial and trade policy regime, through the inception of new economic policy in 1991. The major focus of these policies had been to dismantle the complex web of controls that severely constrained the emergence and operation of the private entrepreneurs. Investment performance has been a key emphasis in the policy debate following the reforms (Athukorala and Sen 1998). It is observed that new policies have made tremendous effects on the industrial sector, in terms of conducive business environment and future growth process of industries.
Understanding of the behaviour of investment provides an important insight into the process of economic development. The economic growth critically depends on capital accumulation and it stems from investment. The economy's productive capacity can be expanded by investment spending as a dynamic variable, on long life capital goods which embody technical advance. However, recent theoretical and empirical studies on the determinants of investment focused on the role of government policy and tried to derive an explicit relationship between the principal policy instruments and private investment (Blejer and Khan 1984, Greene and villaneuva 1991). More importantly, as evidenced in many research works (1),