Determinants of Firm Investment in Developing Countries

This study investigates the determinants of firm investment in four countries: Romania, Russia, Moldova, and Serbia. It found that profitability significantly affects firm investment decisions, and the proportion of cash-holdings is positively correlated with the decision to invest. Only firms with larger cash-holdings invested more than their competitors. However, in the absence of a strong competitive environment, managers are more likely to invest. The findings also suggest that more capital is required to sustain a business.

In contrast, private firms do not receive significantly more government funding. This is a problem for many developing countries. While government financing is more likely to benefit larger firms, small firms are often unable to compensate for their legal and financial systems. Moreover, alternative sources of finance, like trade credit, cannot fill the funding gap. Therefore, government policies that target small firms often fail to generate results. Nevertheless, it is clear that there is an important role for governmental efforts to improve small-firm financing.

In addition to formal job training, the authors study whether firm investment is negatively or positively related to the degree of financial leverage in a country. The authors of the paper use data from a panel of large firms to study the relationship between formal job training and firm investment. Their findings suggest that formal job training is a good investment for many firms, and that it may yield higher returns than physical capital. Nonetheless, there is no evidence to suggest that firms are investing in formal job training to increase their returns.

The authors’ study finds that financial leverage is negatively related to the level of firm investment. Interestingly, this relationship is stronger for publicly-traded firms than for privately-held firms. This finding is consistent with the risk-averse investor model. Similarly, financial leverage may not affect the allocation of firms’ resources, which means that they should not invest more than they can afford to lose. For this reason, they recommend that small firms focus their efforts on improving the financial system and legal systems of their home country.

In the study, the authors also found that financial leverage is negatively related to firm investment. The findings were consistent with the shared sentiment hypothesis. Despite this negative relationship, the findings were still robust in the other two hypotheses. The relationship between financial leverage and firm investment is also positive in low-growth firms. This suggests that the return on formal job training is a good investment for small firms in developing countries. The researchers also found that these companies used debt to finance their investments.

Financial leverage is related to firm investment. A negative relationship is found between financial leverage and firm investment in a public-listed firm. In contrast, the opposite relationship is found between financial leverage and the level of debt in a privately-held firm. The relationship between these two variables is weak for large-cap firms, which are more likely to invest in their own stocks. So, the financial risk factors are crucial in determining firm investment. The underlying causes of underinvestment are complex.