Academic journal article Economia

Corporate Investment in Emerging Markets: The Role of Commodity Prices

Academic journal article Economia

Corporate Investment in Emerging Markets: The Role of Commodity Prices

Article excerpt

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Commodity prices have fluctuated widely over the past two decades. The macroeconomic impact of commodity price swings has been studied extensively in the literature, both empirically and theoretically. However, empirical studies on the link between commodity prices and corporate investment in emerging markets are relatively scant, particularly those based on firm-level data. This paper empirically investigates the determinants of investment at the firm level in emerging markets, with a special focus on the role of commodity export prices. As a by-product, the paper examines the factors behind the post-2011 weakening of private investment in emerging markets (in particular, commodity export prices) and the differences across emerging regions.

Private investment in emerging markets is highly correlated with (country-specific) commodity export prices (figure 1). The comovement of private investment and commodity export prices is especially high in the case of Latin America and the Caribbean and the Commonwealth of Independent States, with correlation coefficients of 0.84. This reflects the fact that these regions include many of the largest commodity exporters. For emerging Europe, the correlation is also strong (0.82), while it is much lower for emerging Asia excluding China (0.36). Private investment in emerging markets has also been highly correlated with capital inflows (figure 2).

We study the determinants of investment in panel regressions that combine firm-level data for about 16,000 listed firms with country-specific macroeconomic variables-notably, commodity export prices and capital inflows-for thirty-eight emerging markets over the period 1990-2013.1 After identifying the key factors driving firms' investment decisions in emerging markets, we shed light on which of these factors have been the main drivers of the sharp deceleration in corporate investment growth since 2011.

Our study generates four main results. First, we confirm the importance of what can be dubbed the usual suspects. In line with previous studies in the literature, we find that emerging market firms' capital expenditure is positively associated with expected profitability (proxied by Tobin's q), cash flows (suggesting the existence of borrowing constraints), and debt flows. It is negatively associated with leverage. Second, and the key contribution of the paper, commodity prices matter. Conditional on the usual suspects, investment is positively associated with changes in country-specific commodity export prices, and the link is statistically and economically significant. Third, investment by emerging market firms is also influenced by the availability of foreign (international) financing.

Finally, based on the first three results, we put the magnifying glass on the most recent event of a fall in commodity prices. Thus, as an extension to our main contribution, we look into whom to blame for the post-2011 investment slowdown. Factors vary across emerging market regions, with the sharp adjustment in commodity prices playing a substantial role in commodity exporter regions (such as Latin America). Another factor was lower expected profitability of firms, which partly reflects the downward revisions to potential growth in many emerging markets. The moderation in capital inflows to emerging markets and increased leverage (particularly in Asia) also played a significant role.

Our paper is related to the extensive empirical literature on the determinants of corporate investment in emerging markets. It relates to a strand that studies financing constraints, typically relying on Tobin's q investment models or Euler investment equations. Most of these studies document the importance of internal financing for firms' investment owing to capital markets' imperfections. Based on this framework, for example, Fazzari, Hubbard, and Petersen examine the case of U.S. manufacturing firms, while Love and Zicchino study emerging market companies. …

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