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

V.R. Prabhakaran Nair
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V.R. Prabhakaran Nair: Centre for Development Studies

Centre for Development Studies, Trivendrum Working Papers from Centre for Development Studies, Trivendrum, India

Abstract: 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.

Keywords: Investment; Manufacturing (search for similar items in EconPapers)
JEL-codes: E22 O14 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2005-03
New Economics Papers: this item is included in nep-dev and nep-mac
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Citations: View citations in EconPapers (1)

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