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 :


1. Industrialize and self reliance

2. Environment for industrial growth

3. 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)






1. DIVERSIFIED / SUPPLEMENTARY CORE INVESTMENT:


1. Greater Private sector role in all sectors

2. Ensure Industrial Growth (not development)

3. Efficient capital output

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

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



1. LEVERAGED INVESTMENT


1. PPP models - Tap benefits of both (govt. and pvt.)

2. Faster execution and more reliable.

3. 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)


1. INDUCED INVESTMENT MODEL


1. Investment through FDI

2. Very lucrative but high risk game

3. Today - packaged deal of Resources , Tech , R&D , Management in progress.

4. 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 TODAYs 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.

TOBINs 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