Uncertainty and Investment Decisions: The impact of Macroeconomic Uncertainty on Firm’s investment in machinery and in R&D

ARZA, VALERIA

Saratov, Rusia - trabajo aceptado - pero finalmente no pude asistir

Conferencia; 5th Globelics International Conference, Saratov, Rusia, Setiembre 2007; 2007

Irreversible long-term investment decisions are affected by uncertaintyabout future behaviour of variables that interfere with returns on thoseinvestments. The novelty of this paper’s approach is to assess microinvestment in machinery and in R&D as response to macro uncertainty.Moreover, since developing countries are subject to often swings in policyorientation, I propose to distinguish between uncertainty about specificaspects of the macroeconomic systems (contingent uncertainty) anduncertainty about the fate of the macroeconomic regime at large(structural uncertainty).Using panel data for Argentina during the period under ConvertibilityRegime (1992-2001) the paper estimates Probit, Linear and Tobit modelsusing a large set of control variables. Macro and firm-level data arecombined in a panel 2,133 firms measured over ten years. The dependentvariables are investment in machinery and investment in R&D.Contingent uncertainty is proxied by indicators of unexpected volatility infour macroeconomic variables (GDP, interest rates, fiscal results, andforeign capital flows). Structural uncertainty, was proxied using anindicator that measures the expectations of devaluation, given theimportance of maintaining the parity between the peso and the US dollarfor the sustainability of the Convertibility Regime.In agreement with most of the existing literature the paper shows thatfirms’ investment in machinery reacts negatively to all measures ofmacroeconomic uncertainty. Moreover, building upon the receivedliterature the paper demonstrates that R&D investment instead reacts onlyto structural measures of uncertainty. Given the importance of investingin private knowledge creation for national economic development and thefact that situations of structural uncertainty are widely spread indeveloping countries, the paper contributes to the literature of economicdevelopment.