Investment Requests and Distributions

Dynamism of the requests and distributions appear to be common currents for developing investment market, under the conditions of free competition. Possibility of realizing these currents din real economical reality depends on the quality of the market monopolization. Under the conditions of reducing competition, when the elements of the market essentially lose their flexibility, it appears on the face of tendencies.

Analyzing of the discussed currents means appearing forming and consisting mechanisms of balance at the investment market and also action of the factors conditioning changing of the investment requests and distributions.

Factors of the investment requests. Leaning upon wide theoretical and practical researches provided in the western countries we may conclude, that the investment request is characterized by frequent changing and it is formed by numbers of complexes of factors, among which we may separate macro- and microeconomic ones.

An important macroeconomic showing influencing upon the investment requests is the volume of national production. It gives rise to the growth or reduction of the investment requests under other equal conditions. Changing of accumulations of people and cash resources also work in this direction. Herewith, not absolute sizes of these showing, but their conformed meanings: the equality among accumulation and usage within the bounds of the used national product are of conclusive importance.

It is known, that in the market economy they consider savings to be the part of income not used for needs. They are sources for the investment resources. The size of the real resources, which are in the economy at every concrete stage of its development, depends on the fact what priorities make basement to the distribution of the production – current usage or accumulation.

Changing of the norm of savings and investments. Changing of the norm of savings influences essentially upon those ones, which are in progress in the structure of social product. Reducing norms of savings gives rise to the growth of usage and reduction of the investment level. That is the reason for capital exclusion overcomes investments. This ruins balance in the economy. Reduction of savings is also followed by the reduction of the volumes of production, investments and usage. Recovering of other balances on other technological level takes place.

Increasing norm of aid gives rise to another script of economical development, which is characterized by degradation of the usage level and growth of the investment one. Increasing investments gives rise to the accumulation of a capital in the industry after some discussion. The level of accumulation and investments are being increased until achieving optimal meaning from the point of economical firmness. This provides higher level of usage with the help of increasing the volume of savings.

As the experience of the developed countries shows, that they used to achieve high level of average live-stock income when they used to direct important part of social incomes towards savings while realizing structural transformation. There is quite firm positive relation between the share of final product used for investments and that of average live-stock income.

Distribution of incomes of people among savings and usage provides analogue influence upon dynamics of the investment. A well-known statement of J. M. Kains about increasing savings together with increasing received income hasn't been proved by statistic researches provided in this sphere. Conclusion about absolute size during usage and distribution of incomes on savings are shown in the works of J. Duisenberg and F. Modillion.Growth of investments is achieved while increasing share of savings in incomes. Herewith, the role of savings, as investment resource depends greatly upon the influence of such factors, as "increasing preference of cash, development (insurance, social insurance) of those institutional savings, basic part of which are not under the disposal of enterprises interested in capital".

Factors influencing upon the investment requests. The expected rate of inflation influences upon the investment requests. From the most common point of view, fastening inflation rates devaluate those incomes, receiving of which are expected from the investments. Inflations also influences negatively upon the volume of investments with numbers of directions, in the way of impeding economical growth in the long-termed aspects, with the help of reducing processes of widening accumulation and production, devaluating industrial funds of every functional form, inflation tax of profit, also by outflow of cash resources to the sphere of circulation from that of production, reducing real profit and savings, by decreasing the capacity of native market and others. That's why, growth of inflation rates and inflation expectation hinter activation of investment activities and looses the stimuli of widening investments.

Formation of the investment request under the conditions of market economy is related with the functioning of financial market, which supports the movement of investment capital and also profit made out of the invested assets.

Financial credit system forms basic capital of the investment requests by accumulating separate investment savings. In such case important role is played by the banks, which may use not only savings, but also cash resources being in circulation and emission. Conjuncture of stock and credit markets defines conditions of the investment placements and influences upon the volume of the investments. With the help of incomes made out of investments, which turn into the dividends and percents at the financial market, further production of potential investment request, which is realized in the way of reinvestment, takes place.

Percentage rate and investments. State taxation and percentage policies influence essentially upon the dynamics of investments. Their regulation appears to be the lever of the state reaction at the investment request. Reduction of the profit taxation under the equal conditions gives rise to the growth of the share of accumulation used for investments.

Loan percentage rate defines the value of the loan resources for the investments. Growth of the percentage rate strengthens motivation of savings and at the same time reduces and makes the investment unprofitable. While falling of the loan percent, investments appear to be more profitable, that's why reduction of loan percentages rate gives rise to the growth of investment and on the contrary. Herewith, the fall of percentage rate, as a factor of activating investments, has its own borders, as at the definite stage of this fall economical agents prefer to save money in more liquid cash form (J. M. Kain's the Theory of Liquidity), and thus they widen outflow of resources to the sphere of security speculation. This provokes a problem of optimal definition of the percentage rate under the given period, as an excessive fall or growth of percentage rate gives rise to the loss for the investment activities. Thus, the influence of percentage rate upon the investment requests is not completely similar.

Norms of profit and investments. Definition of the influence of percentage rate upon the investment requests might not be complete without comparing it with the norms of the expected profit. Herewith, it's is to be noticed, that not nominal, but real rate of the percentage rate plays essential role for making investment conclusions, as the factor of inflation spoils real orienteer. While comparing loan percentage rate with the norms of profit it is possible to receive undesirable results.

It is to be remarked, that the profit plays double role in the investment activity. It may be discussed as an investment sources and, at the same time main goal of investing. Modern researches, which are related with the salvation of difficult problems of mathematical formalizing of the level and dynamics of the investment request, also manifesting definite basic parameters of the investment requests, prove the existence of definite relation between the profit and investments. For example, according to thw analyzing provided by the economical consulting counsel under the USA president, the most important macroeconomic factors influencing upon the dynamics of investments are:

-      Net profit and depreciation assignments calculated towards gross domestic product;

-      The norm of profit towards depreciation assets (calculated by conforming total profit to the depreciation assignment and foresee changing of the paid loan percent with the size of the depreciation assets by the current restoration prices);

-      Profit norm at the share capital by calculation (calculated with conforming net profit to the waste restoration value of basic capital with the current prices);

-      Market price of the emitted shares towards restoration value of the assets (calculated by conforming total share capital to the waste restoration price of the assets with the current prices).

Investment functions and profit. Foreign researchers obtained definite investment functions by depending on the problems of analyzing, where one of the leading parameters of the investment changing are net profit, the dynamics of the profit norm or expected size of the profit. Investment functions may be represented in the following way:

Investment functions (6.1) and (6.2) characterize dependence of net investments to the volume of the ones of earlier period, accumulated basic capital and the size of net profit. According to the research goals, it is possible to fill them and leading such data into the consistence of parameters, as percentage rate at the long-termed loans of the banks.

In the investment functions (6.1) and (6.2) a special place is occupied by the parameter of basic capital accumulated in the economy, which are leaded into the investment equations of negative relations. It expresses the processes of accumulation and surplus accumulation of a capital during the economical cycle and their relations with the dynamics of the profit norm. This mechanism is expressed in the following: growth of the profit norm activates investment request and the growth of net investments that, in its turn, fastens the process of increasing basic capital. The growth of basic capital after the termed structure starts influencing in direction of overcoming profit norm that, in its turn, reduces investments and thus decelerates increasing rates of the basic capital. This reduction leads further separate growth of the profit norm in the economy that gives rise to the development of the following cycle. Thus the mechanism of investments in the capital provides generating of working conjuncture cycle and it makes one of the mechanisms of positive loopback.

Investment function (6.3) shows the model of investments, which begins from the size of the expected profit. They use data of stock-exchange quotation of the share rate of the companies for measuring expected profit. It makes current valuation of the future flow of the corresponding company incomes on the basis of stock-exchange data of securities. The difficulty of consisting aggregated data of stock-exchange quotation of the company shares gives conditions quite narrow sphere of using the given investment function – on the level of separate firms.

The norm of expected profit belongs to those factors, which influence upon investment request on the microeconomic level. We must also ascribe expenses of realizing investments, expectations, changing in technology and others to it.

Norm of the expected net profit is of significant importance in the system of microeconomic factors. This is conditioned by the fact, that exactly profit makes the motivation for encouraging realization of investments. Investors provide placement of their sources when they expect, that the profit made out of the investments overcomes their expenses.  The higher is the norm of net profit, the more is the investments request. Herewith, investment will be profitable only in case, when the expected norm of net income overcomes real rate of percents. Attracting loan resources loses its conception.

The enterprises compare the norm of expected net profit with the loan percentage rate either during using own resources. According to V. Repke, they invest profit in own firm when the level of profit made out of the investment appears to be higher during the loan percent. Otherwise they will be placed at the capital market.[1]

Thus, percentage rate is the criterion of investment effectiveness. Effectiveness of the investment project must not fall below the loan percentage rate. The percentage rate, which makes basis for evaluating the objects of capital placement of the capital of investment assets, does another important function. I. Fisher characterized percent to be the means for "actualization" of every other income, as the method of evaluating every income in time.

Other factors influencing upon the investment request. Following factor influencing upon investment request is the expenses for its realization. They foresee this factor during calculating the norm of the net profit expected from the investment project. The growth of expenses reduces the norm of the expected net profit and on the contrary. Herewith, as the important parts of the investments are of the long-termed character, they foresee time factor as well. In whole, the more are expanses and terms for their expiation, the less is the level of investment request.

Expectation of the industrial persons, who lean upon following requests, the volume of selling and predictions of profitableness also influence upon the volume of investments. Profit made out of the investments will depend upon the growth of these data. Herewith, the groth of optimal expectation gives rise to the growth of investment requests.

The largest profit is made out of the investments in the innovative production, which guarantee reduction of the expenses of enterprise, improvement of the production quality and growth of the expected norm of net profit. That's why changing in the technologies makes the encouraging factor for the investment requests.

Thus, investment request is formed by the influence of the factors of various kinds and directions, which define their flexibility and dynamism.

Formation of the investment distribution has numbers of peculiarities. From one side, as the distribution of commodity, it is conditioned by such basic factors, as value and, also, not valuable determinants: expenses, fulfillment of technologies, taxation policy, expectations, the level of competition and others; from another, investment distribution is discussed to be specified distribution of commodity, as the investment commodity differs for its ability of making income. This defines characteristic peculiarities of the factor, which is being formed by the dependence upon the level of profitableness.

The norm of profitableness and investments. The norm of profitableness makes basis to the values of financial instruments, which support the movement of real capital. Market price of financial assets shows the quality of attractiveness of the placed sources in the investment commodity.

Percentage rate on deposit in the banking system, the size of which defines the home industry flows, influences essentially upon the investment distribution. Herewith, stock-exchange market and that of the loan capitals makes significant terms for stimulating investment distribution.

As during definite consisting of the investment distribution investment request is oriented towards the profitable assets, we conclude, that the volume and the structure of investment distribution influences upon the volume and structure of the investment request. Herewith, investment distribution is basic factor defining the scales of functioning of the investment market, as it gives rise to the changing of the existed requests on the investment commodity. The mechanism of loopback is not expressed so far. It appears only under the conditions of independent competition.

Achievement of the balance between investment request and distribution is possible only in the total scales of the investment market. Their equalization in the marketing system takes place only in the total scales. Working of the mechanism of the balanced prices doesn't characterize only independent competitive market. This mechanism needs investment commodity and changing of prices on the capital on the basis of balancing request and distribution until there is dynamic balance at the investment market, i.e. until they achieve balanced prices on the investment capital and investment commodity and also synchronization of decisions about their sale and purchase.

The Mechanism of balanced prices. Influencing of the balanced prices upon investment market reflects the specifics of the investment commodity. As we have remarked, this is ability of making profit by the investment commodity. Striving for making more income with fewer expenses makes basement to the making decisions by economical subjects about investments. During definite structure of investment distribution the investors will prefer investment commodity, which guarantee maximal norm of profit at the invested capital under the conditions of minimal risk of investments. High market price of the investment commodity, which is conditioned by its profitableness, makes the impulse for directing important mass of the investment capital in these objects of investments. Relocation of the investment capital, in its turn, widens investment request on distribution of the given commodity that gives rise to the effect of rising price and the effect of increasing distribution under other equal period of time. While increasing distribution of the given investment commodity the market mechanism gives rise to the fall of their prices. That is why investment capital outflows to the more profitable spheres of the investment activities. Finally, the discussed process will be finished with dynamic balance at the investment market.

Herewith, balance under the conditions of pure competitive market means that according to the comparison of the expected level of he loan percentage rate and marginal effectiveness of the capital, decisions about investments give rise to the optimal distribution of the planned investments according to the perspectives of growing profitableness.

Thus, this balance is an ideal economical system, which is characterized with joint proportion of the investment resources and their usage, an optimal realization of economical interests of the subjects of investment activities.

Structure and reality of the investment market. The structure of investment market in the reality is far from the ideal model. Absence of pure competition reduces the dynamism of investment request and distribution, which is displayed only in the face of tendencies, also reduces possibilities of balancing them and, relatively, fixing prices at the balanced level. Potential participants of the investment activity have not equal possibilities at the investment market. They have distinguished possibilities for receiving investment commodity per market price. Large oligopolistic investors are in more advantage situation, then those, which are rivals to each-other.

Thus, investment market in real economical practice doesn't play ideally the function of optimal distribution of investments. Though, this doesn't exclude the need of abstract modeling of economical processes, as exactly this gives rise to the displaying of essential relations and currents, define conditions of balances of those elements, which make the totality of economical phenomenon according to the law of free competition.

Balance at the investment market appears to be partially macroeconomic one. Herewith, it also is essential condition for common economical balance. For example, in the well-known model of J. Hicks "ISLM" ("investments-savings-liquidation-money")the balance at the investment market is the same as the balance of commodity market. That is why this model gained the name of the model dual balance of commodity and money markets.

The model "ISLM" reflectsessential relation between investments and money markets. This relation, to our mind, is the most important peculiarity of the investment market.

It leans upon usage of total parameters for investments and money markets as basic macroeconomic characters of these markets. This is percentage rate and the volume of social production.

The balance at the investment market is achieved in case of equality of investments and savings. As we have already exclaimed, investment volume is defined by numbers of factors, though they state the relations to be researched during the economical dependence not by the totality of variables, but by functional unity of just some of them (this totality is considered to be the paribus of cetera).

They use Vsp (the volume of social production) and Pr (percentage rate) to be the endogenous variables of macroeconomic factors influencing upon investments. Remaining factors are considered to be the exogenous variables. In such case investment formula is represented in the following way:

Where, Iev is the part of the investments defined by exogenous variables.

IS curve expresses combination of the volume of national production and percentage rate, during which investments equal to the savings.

Financial mediators and capital market. Correlation of transformation of the investments and financial marketdefines essential role of this latest in functioning of the investment market. In the first place, it is reflected by the fact that the request of enterprises and firms appear in the financial resources of basic and turnover capital form. In this case distribution of investment commodity turns into the cash-credit form. It is represented in the form of family industry and the savings of firms, which are accumulated in the banking system and are granted by definite percent.

Following peculiarity of investment market is also evident. This is the existence of developed web of those financial mediators, which make realize connection between sellers and buyers of the investment capital. Financial mediators gather separate savings of the family industry and firms in the significant mass of the investment capital, placement of which takes place later between the users of investment.

The existed investment potential is concentrated in the institutions of banking system, which have special possibilities for using traditional cash resources and credit emission. Placement of the capital mobilized by financial mediators may be provided in the form of loans, emission of shares, purchasing bonds or other securities and so on.

Equality of a dividend and percent and investment request. The profit, received from this or that financial assets is divided into dividend and percent. This depends on what form they represent – industrial or loan. Wholly they reflect the norm of profitableness of the produced capital valuables. The equality of dividend and percent shows the structure of the investment request, its distribution between firms and banking system. This equality has the form of market price (rate) of financial instruments at the financial market.

For movement of capital valuables financial instruments fasten reaction of the prices on the changing of the norm of profitableness and thus they guarantee fast outflow. The size of their market price appears to be the indicator of the working conjuncture as a result of dynamism of investment activity. Thus, the mechanism of balanced prices at the financial market turns into the sharper forms of displaying.

Essential peculiarity of the investment market is the role that is played by the percentage rate on it. As we have shown, the size of percentage rate gives rise, in the first place, to the size of the savings of family industries attracted by the credit system, and from another, the norm of profitableness of investments. They evaluate even own potential resources of the firms with the help of percentage rate: if the expected profit is higher, then the percentage rate, they direct it to the investments, in other cases they place them at the financial market – in the form of deposits, purchasing securities and so on.

According to the said above, effective functioning of the investment market may be provided only under the conditions of developed financial market and firm banking system. It this case market foundation of percentage rate, equal conditions for investments in regional and branch aspects, attractiveness of long-termed investments and the level of regulated inflation make important conditions for interaction of investments and financial market.

Marketing mechanism cannot provide these conditions. State regulation must conform to the economical currents on the a basis of which market mechanism reacts on changing conditions, it must foresee prediction of various results of the complex of influencing activities, create conditions for realizing potential possibilities of market mechanism in the form of antimonopoly activities.

Author: lamara qoqiauri