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Financing transition: investing in enterprises during macroeconomic transition
This paper examines investment decisions and financing during the transition
to a market economy, and the link between enterprise performance and
macroeconomic conditions. A number of simulations are carried out on three
stylised EBRD investments across three groups of countries in transition. The
main results indicate that investments in Greenfield enterprises are generally
more attractive in countries of advanced transition than in countries of early
transition. This is so because the cost of a Greenfield investment can be
assumed constant irrespective of the country where it takes place, whereas the
returns (cash flow) of the investment in the early transition countries are
much more volatile and may be less favourable. Likewise, for countries of
early transition, debt investments are less attractive than equity because the
very high downside risk is not compensated with an upside payoff. Finally, the
more risk- taking investors willing to invest in early transition countries
should consider equity investments in pre-existing assets. The reason is that
the higher volatility of the returns of these immobile assets is already
"priced in" as a significant discount in their price. The paper concludes with
some reflections as to whether commercial banking -- investing in a portfolio
of loans -- is a commercially viable activity in early transition economies.
The main intuition is that it appears that countries need to have advanced
beyond a "threshold" of progress in transition for commercial banking to
become a profit-making activity.
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