Enterprise Investment During the Transition: Evidence from Czech Panel Data

We analyze investment behavior of the population of medium and large industrial firms located in the Czech Republic in 1992-95. We examine the relevance of alternative models of investment and test if investment behavior varies across ownership-legal form categories of firms. By using a large panel of quarterly observations, we eliminate biases introduced by data aggregation and selectivity, reduce measurement error, take into account heterogeneity across firms and over time, and control for the significant seasonal variation in investment. The data indicate that foreign owned companies invest the most and cooperatives the least. Contrary to earlier survey findings, our large data set does not support the hypothesis that private firms invest more than state owned ones. Our econometric tests suggest that, except for cooperatives and smaller private firms, the behavior of firms is better approximated by the neoclassical/accelerator model than cash flow or financing constraint theories. The data also fit quite precisely a dynamic structural model of investment for a profit maximizing firm.