Theoretical and Methodical Basics of Investment as a Small and Midsize Business`S Development Tool.

By Cherep A.V., Oleinikova L.G., Cherep O.G. and Krylov D.V.

In the monograph theoretical and methodological principles of investment activity and the history of its development have been studied; the investment climate in Ukraine has been focused on; the priority directions of modern governmental investment activities have been determined; the current trends of foreign investments in Ukraine and their interrelations with innovation activity have been analyzed. The concrete proposals for improving the investment climate and the main directions of investment strategy formation in Ukraine have been presented. The role of the state in the investment activity as well as feasibility of state investment policy formation have been determined. The essence and principles of the investment strategy have been investigated. The main tasks of the investment strategy formation have been defined, also promising directions of the investment strategy in Ukraine have been outlined.

• Language: English
• Publisher: AuthorHouse
• Release date: Feb 7, 2020
• ISBN: 9781728343167

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Copyright © 2020 CHEREP A.V., OLEINIKOVA L.G., KRYLOV D.V., CHEREP O.G. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or transmitted by any means without the written permission of the author.

This book will have a circulation of 1000 copies.

Published by AuthorHouse  02/07/2020

ISBN: 978-1-7283-4317-4 (sc)

ISBN: 978-1-7283-4315-0 (hc)

ISBN: 978-1-7283-4316-7 (e)

Library of Congress Control Number: 2020901561

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CONTENTS

Introduction

Chapter 1    The History Of Investment Activities Development

1.1.   Investment policy of the epoch of mercantilism

1.2.   Marxist theory of capital accumulation

1.3.   Neoclassical theory of investment development

1.4.   Institutional theory of industry and business

1.5.   Investment process in the state with market economy

Chapter 2    Investment Climate In Ukraine

2.1.   The modern state of investment activity in Ukraine

2.2.   Foreign investments in Ukraine

2.3.   Innovative activity in Ukraine

2.4.   Ways of improvement of investment climate in Ukraine

Chapter 3    Investment Market And Its Infrastructure

3.1.   Investment market and its infrastructure

3.2.   Investment market segmentation

3.3.   The prospects of the financial market revival and development

Chapter 4    The Essence And Basic Concepts Of Investment Activities

4.1   The concept and economic essence of investments

4.2.   Classification of investments

4.3.   The principles of the portfolio investments formation

4.4.   Regulation of the investment participants cooperation

4.5.   The essence of investment activity

4.6.   The investment process in the market-economy country

Chapter   5 State Investment Strategy And The Aspects Of Investments Management

5.1.   Investment strategy

5.2.   Principles of investment strategy

5.3.   Basic directions of investment strategy

5.4.   Basic tasks of investment strategy forming

5.5.   Perspective directions of investment strategy

Chapter 6    Government Regulation Of Investment Activities

6.1.   The role of the state in investment activities

6.2.   The mechanism of the state regulation of investment activities

6.3.   State investment policy formation

6.4.   The investment activities regulation by state bodies

6.5.   Monitoring of the investment process

Conclusion

Literature

Appendix A

INTRODUCTION

The major task for Ukraine today is not to permit itself to stay aside, at the tail of the global development. For this purpose new priorities in the economic, industrial, scientific and technical policies are required. Our state is considerably behind the processes, possibilities and terms of the integration into the world economy. The main problems are strategic deficit, vacuum of priorities, absence of interrelation and interdependence of the component parts of the state’s economic policy (investment, budgetary, innovative, etc.), grounding of the fundamental changes in the modern world as well as in the situation in Ukraine and the CIS states.

Presently Ukraine is suffering from the great technological depression and this testifies about the threat to the national interests of the state - loss of the world civilization geoeconomic positions. The payment and budgetary crises in Ukraine resulted in the break of the reproduction process and even in the self-close of commodity markets (barter, deficit of money). As a result the national capital moved abroad, and the deficit of money is compensated by the dollar import. It limits the anti-inflationary policy of money stabilization, depreciates the national assets and delays the achievement of the economic growth.

The researches of the problems of investing in economy have always been in the spotlight of the economic science. It is stipulated by the fact that investments touch the grounds of economic activities determining the process of economic growth on the whole. In modern conditions they are the most sufficient way of providing the terms of the market economy formation, structural changes in the national economy, of maintaining the technical progress, increasing high-quality economic performance indices on the micro– and macrolevels. The intensification of the investment process is one of the most efficient mechanisms of the socio-economic transformations.

Today the state of production, position and technical level of the capital assets of the national economy enterprises, possibility of structural alteration of the economy and solution of social and ecological problems depend on the investment policy efficiency. Investments are the development background for enterprises, separate industries and economy on the whole.

Since the time of the independence declaration the economy of Ukraine has not been up to a high level. The reasons for this situation are similar to those in other young states id est. in the countries of transitional economy where the replacement of the command economy by the market economy is carried out.

The global experience testifies that the countries with transitional economies are not able to meet economic recession without attracting and using foreign investments in an effective way as investments not only assist the formation of the national investment markets but also establish other markets of factors as well as commodity and service markets. In addition, foreign investments, as a rule, assist the measures concerning the macroeconomic stabilization and allow to settle separate social problems of the transformation period.

Investment activity to some or other extent is characteristic of any enterprise. To make a decision about investment is impossible without consideration of the following factors: the type of investment, cost of investment project, alternative of available projects, limitation of the financial resources available for investment, risk related to making one or another decision et cetera

The reasons for investment necessity can be different but they can be divided into three types: renovation of the current material and technical basis, increase in the production activity volumes, mastering new activity lines. The degree of responsibility for passing an investment project within the framework of one or another direction is different. Thus, if it is about the replacement of available production capacities, the decision can be made easily enough as the enterprise managers have a clear idea about the volumes and characteristic features of new primary resources. The task becomes more complicated, if it is about investments related to the basic activity extension, as in this case it is necessary to consider a number of new factors: possible changes of the firm’s position on the commodity market, availability of additional material volumes, labour and financial resources, possibility of mastering new markets, etc.

The question about the size of investments is crucial. The profoundness of the project economic analysis, which should be conducted before making the final decision, is to vary. Moreover, in many firms the practice of differentiation of the right to make a decision about the investment project becomes a routine matter. This limits the maximal investment volume, within the framework of which the manager can make a decision independently.

Quite often the decision should be made under the terms when there is a number of alternative or independent projects. In this case it is necessary to make a choice of one or several projects by their criteria. We can see that there can be several criteria and the probability that one project will be better than all the others by the criteria, as a rule, is far less than unity.

Under the terms of market economy there are a lot of possibilities for investment but any enterprise has a limited volume of free financial resources available for investment. Therefore the task of the investment portfolio optimization arises.

The risk factor is very significant. Investment activity is always executed in the conditions of ambiguity, the essence of which can fluctuate critically. Thus, at the moment of purchasing new primary resources it is not always possible to forecast the economic effect from this operation. Therefore, the decisions are quite often made on the basis of intuition.

Making decisions of an investment character as any other type of administrative activity is based on the application of different formalized and non-formalized methods. The degree of their relation is determined by different circumstances including the degree to which the manager is acquainted with the method applied in one or another case. In the Ukrainian and foreign practice there is a number of formalized methods and the calculations made applying them can be the basis for making decisions about the investment policy. There is no universal method for all-in cases. Probably, management is rather art than science. But it is easier to make the final decision having some, even conditional estimations obtained with the aid of formalized methods

1

THE HISTORY OF INVESTMENT

ACTIVITIES DEVELOPMENT

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1.1. Investment policy of the epoch of mercantilism

Before the epoch of the capitalism development economic researches had been fragmentary, mainly falling within practical economic analysis, rarely elucidating genius guesses as to the profound laws of the economic processes behaviour. Economic researches had not been independent but constituted component part of the works devoted to the research of the general issues of society functioning, in particular, religious, political, and moral issues. And this is not sporadic as economy had been natural with insignificant elements of commodity-money relations. The situation changed drastically with the beginning of the capitalist economic relations development. It took place in Europe in the 15-16th centuries of our era in the epoch which was called the epoch of great geographical discoveries and also the epoch of original accumulation of capital. It is known that historically and logically capital initially has a form of trade and money capital. The discovery of new territories and colonial conquest essentially accelerated the process of national trade-money capitals fomation, and this in turn drew attention to the researches of regularities in the field of trade and money circulation. This is the first school in the history of economic thought, which in the course of time was called mercantilism.

What are the distinguishing features of this school? Naturally, being the expression of the merchant capital interests, the representatives of this school consider money to be the absolute form of wealth. Identifying their interests with the interests of the state, the representatives of mercantilism assert that the more gold and silver the nation possesses, the richer it is. Accumulation of wealth (naturally, in a money form) takes place in the process of foreign trade or during precious metals mining. Hence there is the following statement: only work in precious metals mining is productive. However, strictly theoretical researches are of minor interest to the representatives of the mercantilism school. The main emphasis in their researches is placed on the issues of economic policy and lies in the field of recommendations as to an increase of gold and silver inflow into the country. The words ascribed to Christopher Columbus that gold is a strange thing which shows the road to paradise to the souls became the motto of this period of the bourgeois society development. Within the framework of the epoch of mercantilism early and late mercantilisms are distinguished.

The representatives of early mercantilism stake on administrative measures for keeping precious metals in the country. In particular, under a penalty of severe punishment foreign merchants are forbidden to export gold and silver out of the country, and the money made on the sale of commodities is suggested to be spent within the territory of this country. Such severe measures could not help impeding the progress of foreign trade relations, which stipulated the transition to the policy of so-called late mercantilism.

The essence of this policy lies in the following: providing the precious metals increase in the country not by administrative but by economic ways. They include all the ways which assist the active trade balance achievement id est. the surplus of the commodities export above the import as a positive difference in a form of precious metals will remain in the country. These ways were thoroughly described by Thomas Mun (1571-1641), an influential English merchant and most known representative of late mercantilism. T. Mun wrote that there are no other ways to make money except for trade, and when the value of the exported commodities exceeds the value of the annual import of commodities, the purse of the country will increase. For increasing this purse T. Mun suggested, apart from the other ways, that the lands should be farmed to plant the cultures which would help to escape importing some commodities (in particular, hemps, flax, tobacco); he also recommended to reject the overconsumption of foreign foodstuff and clothes by passing the laws about the consumption of domestically-manufactured commodities. T. Mun also notices that domestic commodities should not be charged with too big duties so that not to increase their costs for foreigners too much and not to put obstacles to their sale. Here is a clear expressed orientation to forcing the export of national products.

The economic policy proposed by T. Mun in future got the name of the policy of protectionism or the policy of protection of the national market. In general terms this policy lies in limitation of imports and stimulation of exports, and the measures aimed at achievement of this result have remained unchanged up to now. They include: protectionism tariffs on the imported commodities, quotas, export subsidies and tax remissions to exporters et cetera. Surely, these measures can not be taken without the state support, for this reason the representatives of both early and late mercantilisms consider active interference of the state with economic processes to be natural.

Summarizing the distinguishing features of mercantilism as an economic school, the following ones should be referred to them:

- exceptional attention to the sphere of turnover;

- consideration of money as the absolute form of wealth;

- reference to productive labour only according to the gold and silver production;

- grounding of the economic role of the state;

- belief that the surplus of exports above imports is the index of the country’s economic welfare.

The critics of mercantilism paid attention to the fact that aspiration to achieve the active trade balance only gives a transient effect, as the inflow of precious metals to the country increases the domestic prices, and the doctrine to sell more expensively, to purchase cheaper gets the country into trouble.

A French economist Richard Cantillon and an English philosopher David Hume in general terms described the so-called mechanism of gold and money streams, which automatically results in natural distribution of precious metals between countries and establishment of such levels of domestic prices, when the export of every country becomes even to its import. The essence of this mechanism action lies in the following: the additional quantity of gold in a separate country will increase the level of the domestic prices compared to other countries, and this, in turn, will decrease the competitiveness of the commodities in foreign markets, reduce the volume of the export and increase the volume of the import, and the difference of the surplus of the import above the export will be paid by the outflow of gold. The process will last until a new equilibrium is set between the export and import, which meets a larger supply of gold in the trading countries. Due to the fact that foreign trade and gold are similar to water in two communicating vessels, which constantly aims to be at one level, the policy of pursuit after the active trade balance abolishes itself.

We cannot but mark that the representatives of mercantilism, in particular, T. Mun realized that the inflow of gold to the country increases the domestic prices. It is probable that their recommendations in the area of economic policy in terms of the given-above are difficult to understand, if not to take into account one of the main beliefs of the epoch of mercantilism. The state power was the primary purpose for representatives of mercantilism, and this purpose could be attained, in their opinion, by weakening the economic power of neighbouring states as well as by strengthening its own. Proceeding from the idea that the economic interests of nations are mutually antagonistic as there is a fixed amount of resources in the world, and that one country can become rich only for the account of another one, mercantilists felt free to protect the policy of ruining the neighbour and support the reduction of internal consumption as a purpose of the national policy. According to the figure of speech by F. Engels … nations stood one against another as the misers embracing the money sacks dear to them with both hands looking over their neighbours with envy and suspiciousness . By the way, understanding of economic activity as a game with zero score (the winning of one man or countries is the loss of another) was characteristic of the economic views up to the end of the 18th century.

As another argument in favour of protectionism, in particular, limitation of imports, mercantilists gave the reasons of balance of labour. It was considered to be generally accepted that import is to include raw materials and semi-manufactured goods produced with capital being intensively involved, while export includes finished goods manufactured with labour being intensively involved as in this case employment inside the country is provided. The above-mentioned T. Mun writes, …a correct and profitable for the state policy will be to allow the commodities manufactured from foreign raw materials to be exported duty-free. These manufacturers will hire an enormous amount of poor people and drastically increase the annual export of such commodities abroad, due to which the import of foreign raw materials will rise and this will improve the receipts of the state duty. This widespread and presently protectionist argument was added by the reasons of a military-strategic character as well as the reasons which witnessed for the still weak industries.

The belief that money is a muscular force of war as well as an unobviously present thesis that defence is more essential than welfare were correct.

However, the incentives of providing welfare are present in mercantilism. Mercantilists consider that money stimulate trade: an increase in the supply of money is accompanied by a rise in the demand for goods, and, thus, it is the trade volume not prices that is directly influenced by the inflow of gold. The latter increases the expenses of the rich for luxuries, and up to the end of the eighteenth century the idea which dominated was that it is luxurious life that forms demand and generates money stimuli. Moreover, it was characteristic of the authors of the 17-18th centuries to believe that it was better to spend money on luxuries than to distribute it as in the first case industry is stimulated, and in the latter case money remains inactive. In modern terms the confidence in the idea that it is the higher echelons of society that are to provide workplaces spending money on expensive whims and keeping a huge suite of servants. This paradox was noticed by Bernard Mandeville, a drop-out, philosopher by vocation, and, according to А. Vanikin, a lover to have fun in a jolly crowd who lived in London at the beginning of the eighteenth century. B. Mandeville gained popularity after writing his work named The Fable of the Bees: or, Private Vices, Public Benefits. The main paradox of B. Mandeville is contained in the phrase private vices – public benefits, where there is a clear thought that poor have work only because the rich love comfort and luxury and spend huge amounts of money on the things the demand for which is often only caused by fashion and vanity. Rich lazy people appear to be necessary in this society as their needs generate demand for various goods and services, urge industriousness and ingenuity. According to B. Mandeville, …envy and vanity served industriousness, and their result – changeability in food, furniture and clothes, this strange and funny vice, – became the main engine of trade. However, mercantilists did not hide this. One of the representatives of this school writes that … wastefulness is a vice which does harm to the man not to trade…Avidity is a vice that is harmful both for the man and for trade. He also proved that if everybody spent more, everybody would get large profits and could be in easy circumstances. This witnesses how established the belief in the benefit of luxury and harm of thrift was.

But let us come back to The Fable of the Bees. In its second part B. Mandeville describes the economic system, where all vices disappear. Wastefulness is replaced by thrift. Luxury disappears, the consumption of everything that goes beyond simple physiological needs ceases. But exactly this brings devastation and death to society.

Jumping the gun, it is necessary to say that the idea about the economic necessity of unproductive classes (landowners, priests, officials et cetera), was developed at the end of the eighteenth century by Thomas Malthus, and the idea about the banefulness of excessive thrift and necessity of unproductive expenses, which increase demand and provide population employment, was revived and elevated to the status of inviolable truth in the twentieth century by John Keynes. By the way, J. Keynes estimated the contribution of mercantilists to the development of the economic theory in a positive way, formulated a row of propositions which created an affinity between him and mercantilists. Firstly, it is the proposition about the lack of money as a cause of unemployment. As we will see further, J. Keynes defended the idea that an increase in the amount of money by credit expansion of banks can be the major instrument of the fight against unemployment. Secondly, it is the proposition about high prices as a factor of the trade and production expansion. J. Keynes is known to be one of the founders of the modern conceptions of moderate inflation as a means of supporting economic activities. Thirdly, J. Keynes considered that mercantilists by increasing the amount of money had aimed at reducing the lending rate and encouraging investments. In the chapter named The notes about mercantilism of his work The general theory of employment, interest and money he stated that the concern of mercantilists about the inflow of precious metals to the country was caused by the intuitional feeling of the connection between the sufficiency of money and low interest rates. It is one of the key ideas by J. Keynes.

In fact, in most works of late mercantilists there is the idea that an increase of the money amount in the circulation can render a considerable influence on the increase in the production, …trade increases, only when there is sufficiency of money and commodities rise in price due to demand. The brightest representative of the doctrine money stimulates trade is probably a Scotsman John Law (1671-1729), who considered that the key to the economic prosperity is sufficiency of money in the country. Not that he considered money itself to be wealth, he realised that the real wealth is commodities, enterprises, trade. But sufficiency of money, according to his opinion, provides the complete use of land, labour force, and enterprise talents. No laws, – writes J. Law, – can employ people, if there is no such an amount of money in the circulation that would allow to pay wages to a greater number of people. It is money gain, which makes currently unemployed people engaged, that provides the complete use of labour force and other factors of production.

It is mercantilists who were the fathers of the conception of the lack of money as a cause of unemployment, which was thrown away as nonsense by classical economists.

A bright example is the debates about the lack of money which took place in the British House of Commons in 1621. It was specified that farmers and artisans confirmed the conception almost everywhere due to the fact that …weaving machine-tools do not operate, and peasants are to cancel the contracts. And that is all due to the lack of money! Because of the situation, which arose, it was even decided to start a thorough investigation about the fact where the money, the lack of which was so perceptible, could disappear. As we see, the public bodies of power did not have any generally accepted way to resist unemployment in the country, except for a fight for the increase in the commodities export and the import of money metal for the neighbours’ account.

But let us come back to J. Law. According to him, an increase of money supplies will reduce interest rates and give am incentive to an increase in the production as a possibility of the income increase is created as a result of the reduction in the cost of production, and the profits of those used to be unoccupied will give a new incentive to the wave of the consumer demand. The main difference of J. Law’s views from those of the