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Financial liberalization, private investment and portfolio choice: Financialization of real sectors in emerging markets

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  • Demir, FIrat

Abstract

Using firm level panel data, we analyze the impacts of rates of return gap between financial and fixed investments under uncertainty on real investment performance in three emerging markets, Argentina, Mexico and Turkey. Employing a portfolio choice model to explain the low fixed investment rates in developing countries during the 1990s, we suggest that rather than investing in irreversible long-term fixed investments, firms may choose to invest in reversible short-term financial investments depending on respective rates of returns and the overall uncertainty in the economy. The empirical results show that increasing rates of return gap and uncertainty have an economically and statistically significant fixed investment reducing effect while the opposite is true with respect to financial investments.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 88 (2009)
Issue (Month): 2 (March)
Pages: 314-324

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Handle: RePEc:eee:deveco:v:88:y:2009:i:2:p:314-324

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Web page: http://www.elsevier.com/locate/devec

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Keywords: Private investment Portfolio choice Uncertainty Financialization;

References

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  1. Guncavdi, Oner & Bleaney, Michael & McKay, Andrew, 1998. "Financial liberalisation and private investment: evidence from Turkey," Journal of Development Economics, Elsevier, vol. 57(2), pages 443-455.
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Citations

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Cited by:
  1. Cavallo, Eduardo & Galindo, Arturo & Izquierdo, Alejandro & León, John Jairo, 2013. "The role of relative price volatility in the efficiency of investment allocation," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 1-18.
  2. Alexandre Messa, 2014. "Structural Change In The Brazilianeconomy In The 2000s," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 087, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  3. DemIr, FIrat, 2009. "Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets: Private Investment and Cash Flow Relationship Revisited," World Development, Elsevier, vol. 37(5), pages 953-964, May.
  4. Demir, Firat, 2010. "Exchange Rate Volatility and Employment Growth in Developing Countries: Evidence from Turkey," World Development, Elsevier, vol. 38(8), pages 1127-1140, August.
  5. Engelbert Stockhammer, 2010. "Financialization and the Global Economy," Working Papers wp240, Political Economy Research Institute, University of Massachusetts at Amherst.
  6. Alessandro Federici & Pierluigi Montalbano, 2012. "Macroeconomic volatility, consumption behaviour and welfare: A cross-country analysis," Working Paper Series 3612, Department of Economics, University of Sussex.

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