INVESTMENT MODELS 2

INVESTMENT MODELS
 These models try to find out factors that determine investment by firms through creation of new infrastructure (machinery, factories)
 Investors are unpredictable . There are lot of reasons of changing investment pattern. Mainly guided by performance and speculations.
 These models are different from growth models and must be understood with respect to both National and International perspective .

****Some BASICS over investment  ****

HARROD DOMAR MODEL :
• Saving = National Income – Expenditure
• High Saving Rate  =  High Investment = High growth rate



• COR (capital output ratio) = Capital required to make 1 unit of product

• COR (low) More efficient investment High growth rate

KEYNES MODEL OF BUSSINESS CYCLE

Boom     Investment increase   Peak (stagnation)      Disinvestment    Depression




INVESTMENT MODELS :


1. CORE AND BASIC INVESTMENT :

• Industrialize and self reliance
• Environment for industrial growth
• Govt. Play a decisive role through PSUs.

Example
1. USSR after WW1
2. India after independence (trickle down)

Problems:
1. Deficit increases  (borrowing )
2. Capital deepening  -
(sarkari)  more spending then required with more delay
(Railway in J&K started after delay of 38 year (1985-2013)





2. DIVERSIFIED / SUPPLEMENTARY CORE INVESTMENT:

• Greater Private sector role in all sectors
• Ensure Industrial Growth (not development)
• Efficient capital output

Example :India after LPG 1991. ( Rao mohan model)

Problems :Competition among Giants and SMEs + all we are facing today


3. LEVERAGED INVESTMENT

• PPP models - Tap benefits of both (govt. and pvt.)
• Faster execution and more reliable.
• Security to both public and private enterprise increases.

Example
1. India - Recent projects of Urban development
2. SEZ- still amateur( why?)

Problems(Only look good , Poor in execution)
M.C.A.(Model concessionaire agreement) – Between govt. and private partner
• Responsibility not clear
• Government made not consensus based

(It lead to frustation and delays) and time = money (cost also increase)

Solutions :
• MCA through consensus
• Cooling period (Withdrawl period) should be proper.
• Resolution mechanism - separate and unbiased (Not SC)

4. INDUCED INVESTMENT MODEL

• Investment through FDI
• Very lucrative but high risk game
• Today - packaged deal of Resources , Tech , R&D , Management in progress.
• Augment domestic  investment and overall growth.

Example:
1. China : Investment (major FDI) driven economy.
2. India : On the way (but policy uncertainity reduce interest)

Problems :
1. Local Players must compete else again Wealth Drain Model.
2. Cong- BJP war - Wall mart not invested even 1 penny.


INVESTMENT MODELS IN TODAY’s SCENARIO (Corporate)


ACCELERATOR MODEL
COR =Capital  Input required for 1 unit of output.
For constant COR (including current and past changes) ,  More output leads to more investment.
So, for developing countries (COR high = less efficient) , small increase in output leads to quick increase in investment.

TOBIN’s  “q”  MODEL
“q” = Present value of installed capital / replacement cost of capital
It says,
if q > 1   present value < replacement  (Profit)   High investment
if q < 1   present value < replacement  (loss)      Low investment

CONCLUSION :
 At last there are many other models which are preferred by different countries for rapid growth or any other particular purpose (like sector specific investment)
 Also , one country can follow more than 1 model simultaneously (most countries do the same) allowing one to have more importance.

Personal details:
VARNIM GOYAL