Investment: Constraints on Firms and Links Between Institutions and Growth
Summary of Research Findings:
This empirical project had two main parts. The first used, survey data on manufacturing firms in a number of developing countries (China, India, Brazil, Morocco and Ghana) to estimate models of these firms’ investment and spending behaviours. These models were then used to estimate the effect of uncertainty and finance constraints on investment behaviour. The results indicate that investment spending responds quickly to new information about demand. They also suggest a potentially important effect of uncertainty on long ran capital accumulation. The mechanism through which uncertainty affects capital stock levels in the estimates models is quite novel while the effect of low level of uncertainty on investment dynamics is quite modest. The estimated models suggest a strong negative effect of uncertainty on capital stock levels. For example, the simulations used indicate that permanently halving the level of uncertainty could raise average capital.
The second part of the project investigated the relationship between investment as a share of national income and long run growth rates of income per capita. The main finding is that higher investment predicts faster long run growth. The results are based on the analysis of annual data for 94 countries in the period 1960-2000 and a use of a broad range of econometric methods.
The estimated models also explain persistent differences in investment levels across 61 developing countries. They show that the nature of political institutions and the quality of infrastructure provision are important influences. Countries with valuable natural resources tend to have lower investment rates. This is could be due to weaken political institutions. The research shows little or no additional information inmeasures of political instability or macroeconomic volatility, which has been considered as important determinants of cross-country differences in investment levels in some earlier empirical studies. However, there is a positive effect of private sector credit as a share of GDP in explaining private sector investment shares within the sub-sample of countries that experienced relatively volitale inflation rates.This suggest that financial development may play an important role in cushioning the impact of macroeconomic volatility on private sector investment. The findings from this part of the project contribute to our understanding of how economic and political institutions affect economic growth by influencing the rate of investment. For more details go to Steve Bond’s website or to the ESRC Today website.
Results from this research project have been presented and discussed at seminars and conferences at the World Bank, and in China, Japan and South Africa, as well as at several universities in Europe.
Key publications:
Researchers:
Professor Steve Bond
Dr M M Soderbom
Mr A Malik
University of Oxford
Contact:
Professor Stephen Bond
Senior Research Fellow
Nuffield College
University of Oxford
Tel: +44 (0) 1865 278500
email: steve.bond@nuffield.ox.ac.uk
Duration of Research:
April 2005 - March 2007