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Section 2. Investments
DOI: http://dx.doi.org/10.20534/EJEMS-17-3-7-11
Grosu Victor,
Academy of Economic Studies of Moldova postgraduate student, the Faculty of Economics E-mail: [email protected]
EVOLUTION OF THE CONCEPT OF INVESTMENT AND INVESTMENT MANAGEMENT APPROACHES
Abstract: This article deals with the evolution of the concept of investment and the approaches of investment management: the origin of the concept of investments, which is reflected in the works by classics of political economy, and the modern interpretation of the concept, represented in the papers by foreign and local economists. The article analyzes the content of the investment concept, formulated by various scientists. Models of fundamental economic growth based on their investments and efficiency are presented. Structural changes in the direction of investments at enterprises have been noted.
Keywords: the concept of investment, investment theories, models of economic growth, foreign direct investment, types of investments.
In the conditions of European integration and internationalization of economic relations, investment and investment activity is becoming one of the important factors for achieving prosperity and competitiveness of business. Despite the fact that various scientists made reference to investments and their role in ensuring the development of countries as early as at the beginning of the 18th century, the relevance of the investment activity of enterprises is increasingly pointed to nowadays, in connection with the transition to market conditions of management and the struggle for limited resources. Based on this fact, the importance of the investment management and a deeper understanding of the management mechanisms of company's investment activities is growing.
In the economic literature, investments are defined as investing capital for the purpose of its further increase. At the same time, the capital gain should be sufficient
to compensate the investor for the refusal to use temporarily available funds for consumption in the current period, reward him for the risk, recover losses from inflation in the future and bring the desired income.
The concept of investment, with its broader meaning is addressed frequently in the economic theory and practice outline. The origin of the concept of investments is reflected in the papers by classics of political economy, such as: A. Smith, D. Ricardo, J. Mill (classical theory), E. Hecksher, B. Ohlin, R. Nurkse, I. Fisher (neoclassical theory), J. Keynes (Keynesian theory), F. Machlup, R. Har-rod, E. Domar (neo-Keysian theory), K. Marx (Marxist theory), J. Galbraith (theory of TNCs and monopolistic advantages), H. Minsky, C. Kindleberger (theory of monopolistic advantages), M. Porter (competitive advantage of nations), J. Dunning (theory of the country's investment development).
Originally investments, namely direct foreign investments were analyzed by scientists-economists at the country and branch level. A. Smith, a classical scholar in economic theory argued in his work " An Inquiry into the Nature and Causes of the Wealth of Nations" (1776) that, in the face of restrictions on the export of money capital, the exchange rate of the national currency is declining, prices are rising, because the amount of money (gold and silver) exceeds the actual demand in the country [8, P. 28]. His follower, D. Ricardo, considered the possibility of moving entrepreneurial capital and labor to countries with absolute advantages, respectively, with low production costs and high profit rate.
The importance of investments and their decisive role in the overall employment system was noted by the English economist J. Keynes. In his work, "The General Theory of Employment, Interest and Money" (1936) the scientist pointed out that a country can turn into a real exporter of capital only when its exports of goods exceed imports, and the growth of foreign investment should be supported by the trade surplus of the exporting country [4, P. 52].
In turn, Austrian economist F. Machlup believed that export of capital, influencing domestic investments, could limit them. In capital importing countries investment growth is stimulated, which increases consumption and the growth of national income. And R. Harrod argued that if savings in a country exceed the investments, then the pace of economic growth slows down, and the tendency to export capital increases. American economist H. Minsky, considers foreign direct investment at the level of multinational companies. The scientist argues that direct investment flows of TNCs are directed to other countries, when direct investors have a monopoly advantage over similar local companies of foreign countries.
American scientist I. Fisher made a significant contribution to the development of the theory of investments. According to the scientist, all participants of the investment process, whether they are managers
of companies or their investors, are guided in their activity by only one motive — the maximization of net present value. The peculiarity of this approach was putting forward a hypothesis about certainty of conditions under which the investment decision is being made.
Thus, traditional approaches to the concept of investment can be divided into two groups: (l) mac-roeconomic approach that explains the international movement of capital based on differences in the structure of national economies, and (2) approach based on the theory of firm that considers the activities of a transnational corporation (TNC), as a natural consequence of the growth of firm. It should be noted that, when examining the activities of TNC, the authors approached the evaluation of efficiency from the point of view of the company directly investing in this or that country.
At the same time, the first concepts of investment had two significant drawbacks:
1. There is a limited nature of traditional approaches, which manifests itself in the absence of an analysis of the aggregate assets that have different levels of income and risk;
2. There is only one factor that influences the investment decision, namely, profitability. At the same time, the risk assessment was not given much importance, which was not linked to the level of income.
The macroeconomic approach is characterized by two directions: investing in other countries and attracting foreign investment into the country. In his work "the Economy in seven lessons. Thoughts for those of today and those of tomorrow" (1949) L. Mises draws attention upon the development of foreign investment, which was the most important event in the course of the nineteenth century [5, P. 96]. He believes that the investment of capital across the border have begun to play an important role in bussinesses around the world.
It should be noted, that in the specialty literature, the concept of investment has been variously interpreted and used with several meanings. This con-
cept is treated, either quite narrowly and contradictorily, or by attributing it quite extensive and expansive meanings. Moreover, there is no common scientists' opinion regarding the concept of "investing". Some theorists have attempted to highlight the most important characteristics of the investments made at the micro- or macroeconomic level, insisting, more or less on certain features, that are detrimental to others. Thus, foreign scholars consider that: the investment entails sacrificing curent resources in order to obtain future income, changing a certainty with a future hope (H. Peumans), sacrificing a capital for future achievements (P. Masse) or giving up liquid funds in the hope of higher future revenues, distributed over time (F. Aftalion).
The development of the modern concept of investments is associated with the "portfolio theory of investment" developed by the American economist H. Markowitz. In his "The choice of portfolio" paper (1952), the scientist links profitability and risk and points out that the development of an investment solution involves the achievement of two conflicting objectives of investment: 1) maximizing income, i. e. the investor will choose the type of assets that can bring him maximum income; 2) minimizing risk, i. e. at the moment of making an investment decision, the return on assets is not known, which raises the problem for investor to choose those types of assets, the profitability of which is determined with the maximum degree of reliability [6, P. 77].
There is a significant contribution to the development of modern concept of investments from Romanian and Moldovan scientists as well, such as: M. Bilaus, F. Buhociu, C. Cicea, L. Cobzari, A. Calin, V. Dumitrascu, M. Lupan, D. Slonovschi, M. Stoian, Fl. Staicu, R. Tasca, G. Prelipcian, O. Popovici, A. Paul, A. Popa, Gh. Postelnicu, S. Matei, L. Cistele-can., R. Hincu, A. Horobet, A. Mazilu, C. Munteanu, Gh. Negoescu, I. Vasilescu, I. Romanu, D. Zait.
Scientists link investment and investment activities not only with the income of individual eco-
nomic agents, but also with the economic growth of the country as a whole. Romanian scholar D. Zait, in his paper "Economic Efficiency of Investments" (1987), assesses that investments have to be approached in close connection to the process of economic development and growth. According to the scientist, development depends on the decision-makers capacity:
a) to formulate investment options in line with the set objectives and goals;
b) to improve the strategy and development policies in terms of enhancing the effects of investment;
c) to select investment projects that will allow rational exploition of all material, financial and labor resources for the achievement of set objectives
[9, P. 12].
The importance of investments and their role in economic growth have been approached by the well-known scholars and presented in the examples developed by them (table 1).
If in the early 80-ies of the 20th century, investment was viewed as capital investments in the formation of the production base of enterprises, the purchase of equipment, technological lines and the construction of basic production assets, then in the 21st century, investment takes on a dual meaning. In his work "Investment Strategies in Business" (2009), the romanian scholar G. Prelipcian mentioned that the notion of investment has two meanings:
• in a broad sense, investment is defined as placing sums of money in different areas: economic, social, cultural, administrative, military, etc. in order to build and purchase machinery, installations, buildings, in the pursuit of new technologies, etc., but also for securities, trade, bank or stock exchange transactions, including speculative operations;
• in the narrow sense, from an economic point of view, the investments refer only to the costs of creating or acquiring new fixed and current, productive and unproductive capital, for the replacement, modernization or development of fixed assets existing in the economy [7, P. 6].
Table 1. - Models of fundamental economic growth based on investment and their efficiency
Model name, year of formulation Defining the model Model formula Explaining the model
The Keynesian Model The multiplier (1936) The ratio between growth of income (V) and increase in invest- AV m =- AI shows that at a certain increase in investment, the multiplier expresses whenever the income increases
ments (I)
Harrod Model The capital ratio (1946) operating capital ratio (K) and income (V) b II shows that this year's capital gains will lead to revenue growth in the coming year, which in turn will ensure a new increase of capital
The ratio between
Clark's Model Accelerator (1916) investments made in I Expresses the available invest-
the reference year (I) and the increase in the income (AV) a =- Ay ment as a result of income growth with one unit
Domar Model Productivity of investments (1948) Ratio of production capacity increase (AQ) and volume of investments (I) AQ w =- I reflects the volume of production that can be obtained for an invested monetary unit
Source: [1, P. 8-9].
Another Romanian scholar F. Buhociu claims that investments are "the assembly of resources (material, financial, human, time and information) designed to increase the production capacity of society, of social life in all its aspects, to ensure the achievement in a certain future of the expected effects" [2, P. 6]. At the same time, according to M. Bilaus, the defining elements ofthe investment concept are: (a) the concrete material content of the investment effort, (b) the tinp factor, (c) the efficiency and (d) the risk [1, P. 4].
In practical activities, investments take different forms depending on the purposes and nature of the investment. Depending on the classification criteria, investments in national economy may be:
• investments for construction-assembly works (consisting in the execution of constructions that are considered to be fixed assets for the production, but
also for the assembly of the equipment) and investments in studies, researches, design and personnel training;
• gross investment (consisting of net investment plus depreciation, whose main goal is the replacement of invested fixed capital which contributes to the absolute growth of fixed capital) and net investment (consisting of funds derived from the net national product, with the purpose of raising fixed capital and stocks of raw materials);
• investment in the production sector (investment, replacement, modernization, development aimed at increasing the production capacity, strategic investment which comprises expenditure on scientific research) and investment in non-productive sector (which is: in education, culture and art, science, health and social assistance).
It should be noted that the tendency of increasing gross investments in tangible assets ensures the growth of incomes in the economy of the Republic of Moldova. This effect is based on the fact that the streams of income and expenditure are interrelated: the costs of one economic entity act as an income for another. Any change in income with a certain relationship between consumption and saving causes a corresponding change in consumption and saving. Therefore, the growth of the initial volume of investments leads to a multiple increase in income in the subsequent stages.
According to statistical data, the main investment flows in the Republic ofMoldova are directed to long-term tangible assets. However, there are structural changes in the investment of enterprises by technological purpose: if earlier the largest share (more than 80%) was occupied by the investments in the formation of enterprise's main production assets and the purchase of equipment, modern enterprises increasingly invest in tuition and personnel training, science, innovations and projecting activities.
According to the National Bureau of Statistics, investments in the vocational training for enterprises' employees in 2014 amounted to 97.1 million lei, for preparation of774 people. The largest proportion of
employees who received training in 2014 was represented by manufacturing workers (21%), public administration employees (14%) and health care laborers (13.6%). Enterprises' own funds predominate among sources of financing of professional trainings for employees [10]. Despite the fact that investments in the formation ofhuman capital of enterprises tend to increase, nevertheless, they constitute an insufficient volume (0.5% of the total amount of investments in long-term tangible assets, 1.1% of PIB in 2014) that does not guarantee an expanded reproduction of the country's qualification potential.
Thus, analyzing economic literature, we can conclude that among scholars and researchers there is also no common opinion on the interpretation of the concept of investment. Initially, investments were considered by scientists as foreign direct investment, their importance for the economic development of the country and the industry was argued. Then, investments at the enterprise level were studied in more detail, which allowed forming effective investment strategies. By technological purpose, capital investments are leading, but there is a tendency to change the structure of investment flows in the field of tuition and personnel training, science, innovation and projecting activities.
References:
1. Bilaus M. Gestiunea investitiilor. Iasi: Universitatea "Petre Andrei", - 2007.
2. Buhociu F. Investitii. Braila: Editura Evika, - 2008.
3. Despa R., Zirra D., Munteanu D. Eficienta investitiilor. Bucure§ti: Editura Universitara, - 2010.
4. Keynes J. Teoria generala a folosirii mainii de lucru, a dobanzii §i a banilor. Bucure§ti: Editura §tiintifica, -2009.
5. Mises L. Economia in §apte lectii. Ganduri pentru cei de azi §i cei de maine. Bucure§ti: Institutul Ludwig von Mises, - 2010.
6. Markowitz H. Portfolio Selection. The Journal of Finance. - 7 (1), - 1952. - P. 77-91.
7. Prelipcian G. Investitiile si eficienta in economia de piata. Suceava: Universitatea "Stefan cel Mare", -2009.
8. Smith A., Avutia natiunilor: cercetare asupra naturii si cauzele ei, - Vol. I. Chisinau, Universitas, - 1992.
9. Zait D. Fundamentele economice ale investitiilor. Monografie. Ia§i: Editura Expert Editis, - 1996.
10. URL: http: www.statistica.md
