INVESTMENT MODELS

These models try to find out factors that determine investment by firms through creation of new infrastructure (machinery, factories) Investors are unpredictable . There are lot of reasons of changing investment pattern. Mainly guided by performance and speculations. These models are different from growth models and must be understood with respect to both National and International perspective .

**** Some BASICS over investment ****

HARROD DOMAR MODEL :

Saving = National Income Expenditure High Saving Rate = High Investment = High growth rate

COR (capital output ratio) = Capital required to make 1 unit of product COR (low) More efficient investment High growth rate

KEYNES MODEL OF BUSSINESS CYCLE

Boom Investment increase Peak (stagnation)

Disinvestment Depression

INVESTMENT MODELS :

1. CORE AND BASIC INVESTMENT :

Industrialize and self reliance Environment for industrial growth Govt. Play a decisive role through PSUs.

Example
1. USSR after WW1 2. India after independence (trickle down)

Problems:
1. Deficit increases (borrowing ) 2. Capital deepening (sarkari) more spending then required with more delay (Railway in J&K started after delay of 38 year (1985-2013)

2. DIVERSIFIED / SUPPLEMENTARY CORE INVESTMENT:

Greater Private sector role in all sectors Ensure Industrial Growth (not development) Efficient capital output

Example : India after LPG 1991. ( Rao mohan model) Problems : Competition among Giants and SMEs + all we are facing today

3. LEVERAGED INVESTMENT

PPP models - Tap benefits of both (govt. and pvt.) Faster execution and more reliable. Security to both public and private enterprise increases.

Example
India - Recent projects of Urban development SEZ- still amateur( why?)

Problems (Only look good , Poor in execution)

M.C.A.(Model concessionaire agreement) Between govt. and private partner Responsibility not clear Government made not consensus based (It lead to frustation and delays) and time = money (cost also increase)

Solutions :

MCA through consensus Cooling period (Withdrawl period) should be proper. Resolution mechanism - separate and unbiased (Not SC)

4. INDUCED INVESTMENT MODEL

Investment through FDI Very lucrative but high risk game Today - packaged deal of Resources , Tech , R&D , Management in progress. Augment domestic investment and overall growth.

Example:
1. China : Investment (major FDI) driven economy. 2. India : On the way (but policy uncertainity reduce interest)

Problems :
1. Local Players must compete else again Wealth Drain Model. 2. Cong- BJP war - Wall mart not invested even 1 penny.

INVESTMENT MODELS IN TODAYs SCENARIO (Corporate) ACCELERATOR MODEL

COR =Capital Input required for 1 unit of output. For constant COR (including current and past changes) , More output leads to more investment. So, for developing countries (COR high = less efficient) , small increase in output leads to quick increase in investment.

TOBINs q MODEL
q = Present value of installed capital / replacement cost of capital It says, if q > 1 present value < replacement (Profit) High investment if q < 1 present value < replacement (loss) Low investment

CONCLUSION :
At last there are many other models which are preferred by different countries for rapid growth or any other particular purpose (like sector specific investment) Also , one country can follow more than 1 model simultaneously (most countries do the same) allowing one to have more importance.

Personal details: VARNIM GOYAL