Determinants of Investment

Topics: Investment, Random effects model, Economics Pages: 13 (4151 words) Published: October 16, 2012

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 This has been replaced by a more liberal industrial and trade policy regime, through the inception of new economic policy in 1991.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), it is the private investment that plays a greater role than public investment in determining economic growth in developing countries.

Investment refers to increase in the total assets of a corporation, where new investment consists of addition to its assets, which enables it to produce more output. The growth in industrial output is primarily associated with new investment in plant and machinery. If firms are confident that demand will remain buoyant, they invest more in new plant and machinery which generate even more demand. The escalating domestic demand and growing export orientation has brought an upsurge in the Indian manufacturing sector. Phenomenal growth is registered in automobile sector, iron and steel, machinery and equipment, including transport and basic chemicals sector in recent years. Emphasizing the role of private investment in determining economic growth in a developing economy, a short run analysis of investment determinants becomes crucial for understanding year to year changes in industrial performance.

In this paper, we made an attempt to assess the determinants of investment patterns of Indian Manufacturing sector over the years, at an aggregate level of major industry groups. The aim of this paper is to examine the role of accelerators and financial variables affecting on investment. The broad objective is to investigate, the significance of internal funds as a source of finance and the role of external funding (debt and equity) for industries in determining investment, which are usually channeled towards growing and profitable industries.

It is observed that an extensive volume of research works have emerged, both at the theoretical and empirical levels, to counter the above issues. Theoretically, in modeling the determinants of investment behaviour of a firm, five broad approaches are considered; which include the simple accelerator model, the liquidity theory, the expected profits theory and the neo classical theory of...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Population Determinants Essay
  • Investment Research Paper
  • Investment Essay
  • Investment Essay
  • investment Essay
  • The investment process Essay
  • Determinants Essay
  • Investment Policy Statement Essay

Become a StudyMode Member

Sign Up - It's Free