Profitability, Saving and Investment of Non-Financial Firms in Turkey

How investment is financed matters a great deal to growth, especially in countries like Turkey, where domestic savings are low and financial systems are not deep enough in supplying the funds needed for growth-generating corporate investment. In these countries there is a close link between selfgenerated corporate savings and investment activity, since access to external funds may be difficult, especially for firms that have little to offer in the way of collateral. When the funds available in the financial system are limited and there is a high external finance premium, corporate savings become even more important to fixed investment. This study analyzes the determinants of corporate savings and whether they enhance investment and ultimately growth. Empirical analysis of data from listed firms shows that in Turkey the savings of nonfinancial firms as a percent of net sales are lower than those of nonfinancial firms in major developing countries. In addition, the financial sector in Turkey is far from adept at attracting savings and mobilizing funds for firms that have to depend on external financing. In fact, the ratio of commercial credits extended to bank dependent firms to GDP is not high even though it has been increasing in recent years. These two factors are the main barriers to investment by nonfinancial firms. In other words, investment activity of financial firms proves to be highly sensitive to cash flows, which suggests that financially constrained firms invest less and thus grew slowly. In many countries corporate savings constitute about half of total savings. Policies that encourage efforts to raise corporate savings can enhance both investment and economic growth. The results of dynamic panel data regressions suggest that both firm-specific and macroeconomic variables explain savings of non-financial firms. For instance, firms� saving rates seem to increase significantly with profitability, firm size, Tobin�s q, the GDP growth rate, and financial depth. They decline significantly with the ratio of tangible to total assets, the leverage ratio, the ratio of public debt to GDP, and real exchange rate appreciation.