International Competitiveness, Investment and Finance: A Case Study of India

By A. Ganesh-Kumar; Kunal Sen et al. | Go to book overview

6

Finance constraints, persistent exporting and investment

In the previous two chapters, we have established that investments are crucial for exports, both at the sectoral and firm level. As we discussed in Chapter 1, financial markets and institutions are important in influencing investment and facilitating technological innovation by identifying and funding those firms with the greatest chances of success (King and Levine 1993). In this chapter we explore the determinants of investment and in particular the relationship between financial factors and firms' investment behaviour. Specifically, we look for the presence of finance constraints on the investment decisions of firms in our sample (as defined in the previous chapter), and further we try to trace the source of these finance constraints.

The rest of this chapter is organised into five sections. Section 6.1 presents the theoretical framework that is commonly used to test for finance constraints on the firm's investment decisions. In Section 6.2, we discuss our proposed extension of this framework to test for the sources of finance constraints across different providers of external funds. Section 6.3 discusses the key features of the financial intermediation process in India, with particular reference to the sources and uses of funds of the firms in our study. Section 6.4 discusses the empirical results. Section 6.5 concludes.


6.1

Theories of asymmetric information and finance constraints

Heterogeneity in firms' financing patterns has attracted a great deal of attention in both theoretical and applied research on financial markets. The 'traditional' view is that firms compare the costs and benefits of debt and equity which helps them to choose an optimal leverage ratio. Distinction between who provides the debt and/or equity are not made in this view, and the optimal leverage ratio depends purely on the costs and benefits associated with debt and equity. These costs and benefits can be affected by factors such as bankruptcy costs, taxes, etc.

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International Competitiveness, Investment and Finance: A Case Study of India
Table of contents

Table of contents

  • Title Page v
  • Contents ix
  • Figures xi
  • Tables xii
  • Preface xv
  • 1 - Competitiveness, Investment and Finance 1
  • 2 - The Policy Environment in India 12
  • 3 - The Balance of Payments and National Competitiveness 27
  • 4 - The Determinants of Sectoral Competitiveness 51
  • 5 - Outward Orientation 63
  • 6 - Finance Constraints, Persistent Exporting and Investment 93
  • 7 - Conclusions and Policy Implications 115
  • Appendix 123
  • Notes 146
  • References 151
  • Index 157
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