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Determinants of Firm Investment

In order to evaluate the determinants of firm investment, researchers conducted a study in four countries: Russia, Moldova, and Serbia. Their sample includes 170 firms in each country. The results revealed that profitability positively affects firm investment in all four countries. In Moldova and Romania, the positive effects were limited to cash holdings, while in Russia, firms invested in only technology companies. Nevertheless, larger firms are more likely to invest more than smaller ones.

Although government funding is an easy political sell, the reality is that it is not sufficient to increase small firm investment. In the absence of government financing, private firms often finance their investments through debt. While trade credit is an obvious alternative, it is less common in the underdeveloped countries and is therefore unsuitable for most small firms. Hence, a more comprehensive study of firm investment is needed. In the meantime, a firm’s profitability is an important determinant of its investment decisions.

In the case of Moldova, financial leverage significantly influences firm investment. However, this relationship is not significant for high-growth firms. This suggests that firms with a higher level of information asymmetry should not invest more than firms with lower levels of information. This suggests that small firms are better able to raise their own financing than large ones. As a result, it is crucial to develop alternative sources of finance and improve their own legal and financial systems.

The sensitivity analysis of the models also showed that financial leverage and firm investment are negatively related to each other. The negative relationship between leverage and firm investment was found for both sectors. In the service sector, profitability was found to be the most important determinant of firm investment, while in the real estate sector, it was not. For both sectors, financial leverage and risk aversion were the least important variables in the analysis. This result suggests that small firms are not financially viable and need to develop alternative sources of finance.

The sensitivity analysis also indicated that firm investment was negatively related to financial leverage in both sectors. The relationship between financial leverage and firm investment is positive for firms in the real estate sector, while negative for firms in the service sector. The results of the study are important for policymakers. They should ensure that the public subsidizes the firms in their respective sectors. The emergence of new institutions is crucial for the development of a country’s economy.

The sensitivity analysis showed that the determinants of firm investment are related to profitability in different sectors. The relationship between leverage and firm investment is positive in both the real estate and service sectors. This finding demonstrates that financial leverage is an important factor for small firms. For instance, in a country with a low rate of growth, it is more likely for a firm to invest more in the real estate sector. This difference is a positive finding.