Financing transition: investing in enterprises during macroeconomic transition

This paper examines investment decisions and financing during the transition to a market economy, and the link between enterprise performance and macroeconomic conditions. A number of simulations are carried out on three stylised EBRD investments across three groups of countries in transition. The main results indicate that investments in Greenfield enterprises are generally more attractive in countries of advanced transition than in countries of early transition. This is so because the cost of a Greenfield investment can be assumed constant irrespective of the country where it takes place, whereas the returns (cash flow) of the investment in the early transition countries are much more volatile and may be less favourable. Likewise, for countries of early transition, debt investments are less attractive than equity because the very high downside risk is not compensated with an upside payoff. Finally, the more risk- taking investors willing to invest in early transition countries should consider equity investments in pre-existing assets. The reason is that the higher volatility of the returns of these immobile assets is already "priced in" as a significant discount in their price. The paper concludes with some reflections as to whether commercial banking -- investing in a portfolio of loans -- is a commercially viable activity in early transition economies. The main intuition is that it appears that countries need to have advanced beyond a "threshold" of progress in transition for commercial banking to become a profit-making activity.