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Projects - Details  
  Investment: Constraints on Firms and Links Between Institutions and Growth

Professor Steve Bond
Dr M M Soderbom
Mr A Malik
University of Oxford

Prof Steve Bond
Investment and Finance Sector
Institute for Fiscal Studies
7 Ridgmount Street

Tel: 020 7291 4800
email: steve.bond@nuffield.ox.ac.uk

Duration of Research
March 2005 - February 2007

This project combines a micro analysis of the importance of constraints on business investment faced by firms in developing countries - particularly uncertainty and credit market imperfections - with a macro analysis of the contribution of investment to economic growth. The focus is on the importance of institutions in explaining differences across countries, both in the level of investment, and in the relationship between investment and growth.

This work addresses two issues highlighted in the ESRC research programme: the determinants of the cost of capital and investment for firms in developing countries; and the role of financial, political and legal institutions in promoting investment and growth.

The two studies will use a similar empirical methodology, combining rich panel datasets with modern econometric techniques.

Our study of investment behaviour will exploit unique panel surveys of firms for several African countries, collected by the CSAE and the World Bank. We will estimate structural models that describe firms' investment decisions in the presence of irreversibilities, uncertainty and financing constraints.

Our analysis of institutions, investment and growth will first characterise the heterogeneity across countries in the effects of investment on growth, using annual time series data for many countries. We will then consider the extent to which these differences can be explained, using data on a range of financial, political and legal institutions.

The project will inform debate and policy on the contribution of investment to development. We aim to provide credible answers to important academic and policy questions. For example, how much more would firms in poorer countries invest if they enjoyed more stable conditions or had better access to credit? Which institutional environments promote high levels of investment? Which institutions encourage a strong relationship between additional investment and faster growth?
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Remarks, comments and contributions are welcome at: t.byne@econ.bbk.ac.uk
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Last updated November 2005
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