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Determinants of fixed investment: A study of Indian private corporate manufacturing sector

  • V.R. Prabhakaran Nair

    (Centre for Development Studies)

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    This paper analyses the determinants of fixed investment in the Indian Private Corporate Manufacturing sector for the period 1973-2002, using Annual Survey of Industries Data. It is argued that economic policy of a nation is crucial in determining the investment behaviour in developing countries rather than the traditional factors like output and profit. Against the background of the financial sector deregulation initiated in India since 1991, this study makes an attempt to analyse whether the traditional factors or the economic policy variables plays a major role in determining investment behaviour. A reduced form equation derived from the neoclassical investment theory is used for the empirical analysis. Financial Liberalisation Index is constructed for India for the analysis. The results show that, the traditional determinants like output and profit still plays a major role in determining corporate investment rather than the policy variables. Though aggregate financial liberalisation, and more prominently domestic financial liberalisation produced an environment conducive for investment, it could not succeed in creating a sustained increase in capital formation in the post reform period. In other words, firms consider the demand factor, internal liquidity position and past investment decisions etc as the major indicators for future investment. Only index shows strong positive association with corporate investment is index of money market liberalisation. It is also found that there is significant negative association between index of capital account liberalisation and corporate investment. The negative and significant relationship with index of capital account liberalisation and investment raises many concerns over the credibility of external (international) financial reforms.

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    Paper provided by Centre for Development Studies, Trivendrum, India in its series Centre for Development Studies, Trivendrum Working Papers with number 369.

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    Length: 64 pages
    Date of creation: Mar 2005
    Date of revision:
    Handle: RePEc:ind:cdswpp:369
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    1. de Melo, Jaime & Tybout, James, 1986. "The Effects of Financial Liberalization on Savings and Investment in Uruguay," Economic Development and Cultural Change, University of Chicago Press, vol. 34(3), pages 561-87, April.
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    3. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
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    5. Mario I. Blejer & Mohsin S. Khan, 1984. "Government Policy and Private Investment in Developing Countries (Politique des pouvoirs publics et investissement privé dans les pays en développement) (Política estatal e inversión privada en lo," IMF Staff Papers, Palgrave Macmillan, vol. 31(2), pages 379-403, June.
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    9. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-47, December.
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    11. Seghezza, Elena & Baldwin, Richard E., 2008. "Testing for Trade-Induced Investment-Led Growth," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 61(2-3), pages 507-537.
    12. Jagdish N. Bhagwati & T. N. Srinivasan, 1975. "Foreign Trade Regimes and Economic Development: India," NBER Books, National Bureau of Economic Research, Inc, number bhag75-1.
    13. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
    14. 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.
    15. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
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