Determinants of Firm Investment in Developing Countries

A study by Kaplan and Zingales (1997) examines the determinants of firm investment in four European countries: Moldova, Romania, Russia, and Serbia. They find that profitability significantly explains firm investment in these countries. Cash holdings were also found to be positively related to firm investments in these countries. The largest firms, however, invested in the least-profitable sectors. These findings suggest that size matters when determining whether a firm will invest its own funds, but further research is needed to fully understand this relationship.

Firm Investment

A firm’s investment decisions are affected by a number of factors, including the degree of uncertainty surrounding the firm’s future performance. The level of uncertainty surrounding the market is an important factor, and higher levels of uncertainty will lead firms to cut their investment plans. In addition to the financial aspect of investment decisions, firms also consider other factors, such as the nature of the industry, the type of competition, and the size of the company. For example, high levels of debt are generally associated with lower returns than lower-risk firms.

As the authors of the study point out, despite the importance of capital stock, small firms are still not significantly more likely to get funding from government sources and development banks, so these programs have little impact on actual investment decisions. The majority of government-sponsored programs, which focus on expanding small-firm finance, tend to support larger firms and tend to be politically popular. Further, the lack of a stable legal and financial system in developing countries makes it difficult for small firms to fully compensate for this shortcoming.

Ultimately, the size of a firm’s portfolio affects the level of capital investment. Larger firms, on the other hand, have higher financial leverage, which is beneficial for firms that are highly information-asymmetric. Regardless of their size, financial leverage influences the allocation of firm resources, especially in low-growth countries. While this is good news for public sector companies, this situation presents significant problems for small companies, too. This research indicates that if firms lack adequate access to financial resources, they will have to rely on trade credit or other means.

In addition to being politically and economically attractive, firms should also consider how to finance their investment. While government-funded investment programs are not very attractive for small firms, they should be implemented in the context of a specific country’s legal and financial system. This will help ensure that the money a firm raises will be sustainable. The size of a firm’s financial resources will depend on the market, not on the size of its competitors.

A firm’s financial leverage is directly related to its investment in capital. It is an important factor, but its investment decisions are also impacted by the type of firm and the characteristics of its employees. If a firm invests in a workforce with formal training, the cost of hiring the workers will be higher, but it will still be lower than if the company does not invest in training. In terms of growth, financial leverage is not a significant factor.