Among the determinants of firm investment is profitability, a key factor that is often neglected. The current study examines firms in Moldova, Serbia, Russia, and Ukraine. The sample contains a total of 170 firms. In Romania and Moldova, firm investment is positively related to profitability, while in Russia and Ukraine, the effect of cash holdings was significant only for small firms. This result suggests that larger firms are more likely to increase their investment in the long run.
Another reason why small firms are less likely to receive funding from development banks and government sources is the underdeveloped legal and financial systems of these countries. In these countries, government programs aimed at expanding small-firm finance tend to be easy to sell, and the incentives for investment in the real estate sector and service sector are often higher. Alternative sources of finance are not adequate for small- to medium-sized firms, and they can’t compensate for underdeveloped legal and financial systems.
Despite the political appeal, government programs focused on increasing small-firm finance rarely result in more investment in small firms. In many cases, large-size firms are more likely to obtain government funds, largely because they are easier to control. However, if these governments were to make policies that would encourage the growth of small-scale companies, they would likely have to lower tax rates, improve infrastructure, and expand trade credit. Even in these cases, there are alternatives to raising equity, but these are not as effective as public funds.
In Moldova, equity firms typically purchase companies through auctions and then use various strategies to increase value. In some cases, these strategies may include introducing new technologies or processes. In other cases, the firms may cut staff or close unprofitable units. Ultimately, they can exit the company through an initial public offering or sell it to another equity firm. This is a difficult process in many parts of the world. But it is possible to find solutions for these problems through these methods.
Currently, equity firms are more likely to receive government funding than large firms, and they also tend to get a higher share of it from their competitors. The main reason for this is that equity firms do not have as much influence over the economy as larger firms. Furthermore, government funding is more effective for large businesses in a developing country because the law favors smaller businesses. In addition to this, the lack of public funds makes it harder for investors to understand small companies.
The sensitivity analysis of the models shows that profits of privately held firms are not significantly correlated with firm investment. In Moldova, public firms are less likely to invest in the real estate sector because the costs of financing are higher in the country. While profitability is an important determinant of firm investment, there is no clear link between these two factors. As a result, there are other factors that influence the decision of a firm to invest. In this case, a government-funded program aimed at extending capital to smaller enterprises has a high political value.