نواقص بازار سرمایه و مالیگرایی بخشهای واقعی در بازارهای در حال ظهور: سرمایه گذاری خصوصی و بازنگری روابط جریان نقدی

The paper analyzes the impacts of cash flow from multiple investments in real and financial sectors on the new fixed investment spending of real sector firms. The empirical results based on the Euler equation approach and semi-annual firm level data from two major emerging markets, Mexico and Turkey, suggest that profits and rates of returns from fixed and financial assets have differential effects on fixed investment spending of real sector firms. Accordingly, increasing availability and accessibility of alternative investment opportunities in financial markets can become instrumental in channeling real sector savings to short-term financial investments instead of long-term fixed capital formation and thus lead to deindustrialization.

What are the determinants of fixed investment under capital market imperfections? This question has been at the center of a growing number of research following the financial liberalization wave of the 1990s that reshaped the economic landscape of a majority of developing countries. According to the proponents of this global move toward liberalized financial markets, the radical surge in capital flows combined with increasing competition and the removal of barriers of entry in domestic asset markets are expected to eliminate capital market imperfections that limit developing country investment performance.1 This positive view of financial liberalization, however, has been challenged given the declining fixed capital formation rates in major emerging markets during the 1990s amid comprehensive liberalization programs (UNCTAD, 2003). Accordingly, financial liberalization has been criticized for causing increasing uncertainty and volatility, boom-bust cycles and financial crisis episodes, persistence of capital market imperfections, and reverse flow of funds from developing to developed countries (Diaz Alejandro, 1985, Stiglitz, 2000, UNCTAD, 2003, UNCTAD, 2006, UNCTAD, 2007 and Weller, 2001). Furthermore, “the financialization view” has questioned the allocative efficiency-gain arguments by pointing out the portfolio choice problem faced by real sector firms between irreversible fixed and reversible financial investments after financial liberalization. Accordingly, increasing volatility and uncertainty, increasing real interest rates and lack of credit availability, and increasing product market competition when combined with the availability of higher rate of returns in the financial markets may hinder real investments while favoring short-term financial investments (see. Crotty, 2005, Demir, 2009, Dumenil and Levy, 2005, Epstein and Jayadev, 2005, Orhangazi, 2008 and Stockhammer, 2004). In this respect, increasing share and importance of financial investments in the portfolios of real sector firms is pointed out as one of the main reasons behind the disappointingly low fixed capital formation rates since early 1990s. On the other hand, the financialization of real sector investments may not necessarily be a negative development for real sector firms. Accordingly, given that the rate of return on financial assets is an increasing function of risk, real sector firms may choose to exploit such investments to hedge against uncertainties regarding their operations as suggested by the standard portfolio theory of capital. As a result, financial investments may have a positive impact on the overall profitability of private firms and therefore on new fixed investment spending under credit constraints. The central motivation of this paper is to combine these opposite views of financial liberalization when analyzing the determinants of fixed investment under credit constraints. In particular, we explore the net effect of internal funds on new fixed investment spending of real sector firms in the presence of multiple investment options in real and financial sectors. In this respect, building on the financialization view, the article revisits the findings of previous research on the relationship between cash flow and private investment under credit constraints by suggesting that the availability of internal funds may be a necessary but not a sufficient condition for financing real investment projects. Accordingly, profits from fixed and financial assets, and their respective rates of returns may have different effects on new fixed investment decisions. Given the lack of micro-level analysis of developing country experiences, we tested the above hypothesis using micro evidence from two major emerging markets, Mexico and Turkey. The dataset we employed is unique and can be expected to advance the existing debate on the determinants of private investment under financial liberalization. Briefly, we developed a highly detailed semi-annual panel of all publicly traded industrial firms in Mexico and Turkey using comprehensive balance sheet and income statement data. The choice of these two countries is of no coincidence. Briefly, Mexico and Turkey have been among the forerunners of financial liberalization and their experiences occupy a central place in policy discussions regarding the effectiveness of liberalization programs in developing countries.2 However, despite being portrayed as success stories at the early stages of comprehensive liberalization programs, their ensuing economic performances were far from initial expectations. In particular, despite the radical increases in capital inflows since early 1990s, low fixed capital formation rates remain an important problem and a significant source of puzzlement for policy makers in both countries (UNCTAD, 2003 and UNCTAD, 2006).3 The empirical results based on the Euler equation approach provide support to the main hypothesis while identifying certain differences between Mexico and Turkey. Briefly, in both cases we found that capital market imperfections continue to persist under financial liberalization. More importantly, we discovered that profits from real and financial sector investments have quite different effects on private fixed investment spending. Accordingly, profits from financial investments appeared to provide a hedging mechanism by providing additional cash flow in the subsequent periods. In both Mexico and Turkey, however, the positive effect was much weaker than the one from operating profits. The net effect of cash flow from financial investments is actually negative in the case of Mexico, and even though it is positive in Turkey, the economic effect is significantly smaller than that of operating profits. However, once controlled for the (negative) effect of the rates of return on financial assets, the cash flow from financial investments is found to have a positive effect on fixed investment spending in both countries. Furthermore, comparing differential impacts of cash flow on small and large firms, we found that large firms faced an increasing credit squeeze during the 1990s. More interestingly, unlike large firms our findings indicate a positive effect of financial profits on fixed investment spending of small firms in both countries. The paper is organized as follows: Section 2 presents a brief review of the literature on the effects of financing constraints and financial liberalization on investment. Section 3 introduces the financialization hypothesis followed by the theoretical model in Section 4. Section 5 introduces the data, methodology, and estimation methods. Section 6 presents the main results. Section 7 concludes the paper.

The financial liberalization wave of the 1990s and the following integration of global capital markets opened new venues for portfolio diversification of real sector firms including the possibility to invest in non-real sector activities such as those in financial markets. Given this observation, the current paper revisited the capital market imperfections debate using some of the insights of portfolio theory of capital and the financialization view. Accordingly, we have tested the impacts of the financialization of real sectors as well as the persistence of capital market imperfections in two major emerging markets after financial liberalization. The empirical results using firm level data confirm the findings of other papers by showing the persistence of credit constraints. In addition, the key contribution of this paper has been to show that in the presence of multiple investment options the availability of internal funds is a necessary but not sufficient condition for financing fixed investments. Accordingly, the source of funds is as much important as the availability of funds themselves given the differential impacts of profits and rates of return from fixed and financial assets. Although theoretically speaking, increasing share of financial assets in the portfolios of real sector firms may play a positive role in hedging risks and increasing profitability, and therefore in increasing overall efficiency, our results provide mixed evidence for this conclusion. Accordingly, past profits from financial investments are found to be providing additional funds (the same as operating profits) to support new fixed investment spending. However, the net economic effect is found to be weaker than that of operating profits, and indeed becomes negative in the case of Mexico. Furthermore, we find that the past rates of return on fixed and financial assets have exactly the opposite effect on new fixed investment spending of private real sector firms in Mexico, that is positive for the former and negative for the latter. In contrast, we find both rates of return to have a positive effect on new fixed investments in Turkey, although with 480 times stronger economic effect for the rate of return on fixed assets than financial ones. However, after controlling for the rates of return on both types of assets, cash flow from both fixed and financial investments is found to have a positive effect on new fixed investment spending in both countries (though statistically significant only in Turkey). The findings indicate that the financialization of real sector investments may be behind the slowing down of capital accumulation leading to deindustrialization in developing countries. Accordingly, in contrast to the expectations of the proponents of uncontrolled financial liberalization and deregulation, increasing availability and accessibility of financial investments to real sector firms may actually be detrimental to long-term investment and growth prospects of developing countries. Given these findings, some policy recommendations to increase real investment rates in developing countries include (a) elimination of capital market imperfections in the form of opening up of long-term credit channels for fixed investments, (b) provision of macro and microeconomic stability that helps reduce market volatility and real interest rates (through risk premium), and increase planning horizons of real sector firms, (c) reduction in real interest rates that not only depresses real investment but also lures firms to engage in financial investments, (d) avoidance of misalignment of exchange rate that hurts the competitiveness of real sector firms and overall trade performance, and (e) reduction in public deficits and borrowing requirement that contribute to high interest rates. Finally, financialization of real sector activities encompasses a broader set of questions and policy debates including the role played by international capital flows in limiting the policy choices available to developing (and developed) countries. In particular, given that financial liberalization has been Pandora’s Box, we suggest that there is an urgent need to reform both the domestic and the international financial systems so that domestic and foreign savings are directed toward productive investment rather than speculative and highly volatile financial ones. To achieve this, the excess volatility in capital flows should be curbed using capital controls as recommended by UNCTAD (2006). This will not only help reduce boom-bust cycles, but also decrease economic uncertainty and volatility in key macro and micro prices including the inflation and the exchange rate. Given that currently under liberalized financial markets the monetary policy is mostly limited to the control of short-term interest rates, restoring control to financial markets would free central banks from the pressure to raise interest rates to curtail financial speculation and avoid capital flow reversals. This would also release the pressure from real sectors by reducing the opportunity cost of fixed investment projects, both by lowering the cost of external financing and by reducing the rates of returns on alternative investments in the financial markets.