How does the macroeconomic context influence long-term investment behaviour? Firm’s decisions to invest in R&D and in machinery in Argentina during the 1990s

ARZA, VALERIA

Brighton

Conferencia; The Second International PRIME Doctoral Conference; 2005

Prime Network, SPRU, University of Sussex

This paper analyses the macroeconomic determinants of investment behaviour in Argentina during Convertibility Regime, which transformed the macroeconomic context in a direction that should have improved the confidence in business. I select indicators of business confidence that I consider characterise the main framework conditions within which firms take decisions. There are two sets of conditions that contribute to build confidence in businesses. On the one hand, there are changes in objective conditions that support businesses (e.g. rule of law, infrastructure, political instability, policy consistency, etc.) -namely, conditions of business support. On the other hand there are changes in the investment climate, as the investor perceives it, which contribute to the formation of optimistic/pessimistic expectations about the prospective rewards of investment projects and trigger rather spontaneous investment initiatives -namely, business spirits. I study the effect that these two sets of conditions on decisions to invest and how much to invest in R&D and in machinery. The paper provides a methodological framework to characterise the different nature of these investment decisions that proves to be useful to anticipate impacts from changes in the macroeconomic environment.  The empirical analysis uses macro and micro data in a panel of 2133 firms and 10 years over the period 1992-2001. I estimate a Probit, a Fixed Effects and a Tobit model to estimate both, the decision to invest and the magnitude of that investment.  After controlling for a large set of micro and meso determinants of investment decisions, I find that business support has a positive effect to initiate both types of investment but has no clear effect on the magnitude of such investment. In turn, business spirits seems to be relevant only to explain investment in machinery. The relevance of the paper is to show that while improving the macroeconomic fundamentals is definitely a necessary condition to support investment decisions, they might not be sufficient to enhance long-term innovative behaviour. Specific policy measures in the area of Science and Technology should also be pursued.