Investment demand in early stages of growth: The case of Philippine manufacturing

Theories of economic growth have traditionally minimized the problem of effective demand by assuming that the only limit to investment is the volume of savings from all sources. We explore this assumption by investigating the nature of the investment demand function for a cross‐section of 160 manufacturing companies in the Philippines. We regressed investment on a number of variables suggested by theory, such as the rate of profits, lagged sales, etc. The major conclusions are as follows: (1) For small firms, investment is mainly dependent on the rate of retained earnings. (2) The dominant importance of internal fund sources for small firms is due to their view that maintenance of complete control is a primary constraint on investment policy. (3) Large firms’ investment, in contrast, depends mainly on accelerator affects, and and their investment behaviour is generally similar to firms in developed countries as described by Eisner and others. (4) Foreign firms generally exhibit behaviour similar in many respects to small firms, partly because of their reticence to share control with local residents. (5) Depreciation is not nearly as important an explanatory variable for gross investment as in developed countries, partly because of the difference in the relative sizes of capital stock and investment. (6) In numerous industry regressions we investigated the impact of tax exemption on investment, and conclude that tax exemption is not an effective policy tool for achieving significantly different investment rates. (7) A plausible general inference from our findings is that as development proceeds and the size composition of firms changes in favour of larger, possibly publicly owned enterprises, the economy‐wide investment demand function is likely to become more accelerator‐oriented in its behaviour.