Modeling the relationship between investment processes and costs structure applied to Russian economic activities in 2005-2009

In this study a model framework for the relationship between investment processes and the dynamics of production costs for the period 2005–2009 is developed and tested. Close attention is paid to the dynamics of costs of acquiring raw materials, intermediates, and accessories for production process. The official Rosstat’s statistics on key economic activities in Russian mining and manufacturing sectors, electricity, gas, and water supply sector is analyzed. The aim pursued in this paper was to find out what factors may influence unit costs (costs per ruble of output) and technological progress determined as lower unit costs as a result of higher investments. It is assumed that different types of investment, including fixed investment, R&D investment, and foreign direct investment, may have an impact on the state of technologies for an economic activity. To verify the hypothesis that investments matter for production process we estimate long-run relationships between costs per unit of output and investments, taking into account the possibility of structural breaks in the data which covers the beginning of the current crisis. The results suggest that the effect of investments on costs varies across the economic activities, and the 2008 crisis appears to undermine the hypothesis of investment efficiency