Determinants of Firm Investment
The main determinants of Firm Investment are the size of the firm, the profitability, and the cash holdings. The study uses data from four countries, Moldova, Romania, Russia, and Serbia. For each country, the authors found that profitability positively influenced firm investment. However, the cash holdings of firms were only positively associated with Moldova and Serbian firms. It is unclear why larger firms tend to invest more. It is possible that managers are more likely to invest in larger firms.
Another factor related to firm investment is the level of financial leverage. Financial leverage has a negative impact on firm investment, especially in countries with high information asymmetry. The relationship is positive for the service sector, but not for the real estate sector. The results are significant for the real estate sector but not for the service sector. These findings are important because firms are more likely to invest in the real estate sector than in the service sector. It is important to note that the level of financial leverage plays an equal role in determining the level of investment in each sector.
Financial leverage negatively affects firm investment. Although the relationship is weaker for the real estate sector, it is significant for the service sector. Both sectors show negative returns when financial leverage is present. It is important to note that the return to formal job training differs from firm to firm. This suggests that firms can reap higher returns from investing in formal job training compared to their physical capital. While this relationship does not hold for high-growth firms, it does suggest that firms can benefit from this type of investment.
Despite the fact that firms do not significantly benefit from government funding, many studies have shown that they invest more in large companies in underdeveloped countries. The problem with government funding is that small firms don’t have adequate legal and financial systems to support their operations. Consequently, alternative sources of finance do not help compensate for the gap. Even if trade credit is available in developing countries, it is rare for smaller firms to obtain it. This leads to underinvestment in these sectors.
Financial leverage is another important factor that affects firm investment. The relationship between financial leverage and firm investment is negative for low-growth firms and positive for high-growth firms. The results of the study are robust to different types of uncertainty and firm characteristics. In addition to a high-growth economy, many firms’ investments in real estate are underdeveloped in some regions. They lack access to trade credit, a major source of capital in underdeveloped countries.
In developing countries, government financing is not sufficient to support small firms in their growth. The government can help these companies to expand their operations, but these funds are often not enough. A lack of trade credit is one of the main reasons why firms underdeveloped countries fail to invest in small businesses. The lack of trade credit makes it hard for smaller firms to invest in larger companies. This is why it is essential for developing countries to develop a sound infrastructure and financial systems.
