Determinants of firms' investment behaviour: A multilevel approach

This paper investigates micro and macro determinants of firms' investment behaviour using firm data from 101 developing and emerging economies. A substantial number of firms in our sample does not invest in fixed capital or invests little relative to sales revenue. Using a multilevel probit model we study what factors trigger investment and using a multilevel Heckman selection model we study what factors influence a firm's investment to sales ratio. Although we find that both micro and macro determinants explain investment behaviour, firms' investment behaviour is heterogeneous in nature and has little dependency on a country's macroeconomic setting. In addition, we find that, on average, firms which are completely foreign owned have a relatively lower investment to sales ratio. Finally, we find evidence which suggests that the probability of investing is higher for firms located in countries with more property rights protection and control of corruption and we find some evidence which suggests that foreign owned firms located in countries with `good' institutions invest relatively more.