Risks associated with investments in working capital of enterprises
Current assets
Types of risks
In
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n ri
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C
us
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ba
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rupt
cy r
isk
N
at
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al
d
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C
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dit r
isk
Ex
ch
an
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isk
In
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te
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C
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Pr
of
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ris
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isk
1. Stocks (raw materials, finished products)
+
2. Accounts receivable
+
3. Cash
+
4. Loans to other enterprises
+
+ + +
5. Investments in a deposit account
+
+
6. Investments in foreign currency
+
+
7. Investments in securities
+ + + + +
As can be seen from the table, working capital is affected by fewer risks,
and short-term financial investments in the unfavorable financial market
environment can seriously undermine the financial position of the enterprise
and, in extreme cases, lead to insolvency.
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4. STUDYING INVESTMENT ATTRACTIVENESS:
A THEORETICAL BASIS
4.1. The Economic Content of the Investment Attractiveness
The development of a modern integrated economic system depends on the
effectiveness of the formation of state investment policy and the investment
attractiveness of the regional economy, industry, and households.
Studying the criteria of investment attractiveness, first, it is necessary to
study its main components, as well as to identify optimal ways of managing
both individual business entities and the economic system.
As economic relations develop, economic relations undergo significant
changes, become more complex, and special forms of capital integration appear.
The components of the economic system are also being modified, the criteria for
assessing investment attractiveness are being transformed.
The term “investment attractiveness”, proceeding from the concept of
“attractiveness”, means a set of certain qualities, including qualitative and
quantitative characteristics. So, V. Dahl (Даль, 1998) interprets attractiveness as
“temptation”.
The definition of the essence of the concept of “investment attractiveness”
serves as the basis for the study of the principles and conditions for the
development of the economic system, the functioning of sectoral, intersectoral
complexes and individual economic entities.
In our opinion, for a deeper and more complete study of the investment
process, most attention should be paid to a retrospective analysis of the concepts
of “capital”, “investment”, and “investment attractiveness”.
The essence of the concept of “investment” in the scientific community is
explained in different ways. A critical understanding of the various
interpretations of this term allowed us to conclude that in the economic literature
the concept of “investment” is defined as capital aimed at updating the means of
production, development of production and social infrastructure.
Significant contribution to the study and development of questions of the
essence of capital has been made by such scientists as W. Sombart, E. Böhm-
Bawerk, P. Sraffa, H. Kurtz, as well as neo-Ricardian economists J. Stidman,
L. Manvoring, B. Sheffold. Based on the ideas of A. Smith, D. Ricardo, and
K. Marx, they developed the classical economic theory through an in-depth
study of the formation of the cost of capital.
It should be noted that representatives of different economic schools
defined “capital” in different ways: as value bringing surplus value (A. Smith,
D. Ricardo, K. Marx); part of the wealth involved in the production process
(E. Böhm-Bawerk, P. Sraffa); accumulated wealth (F. Wieser, I. Fischer,
J.S. Mill); cash value reflected in the accounts of firms (J.R. Hicks); the
combination of equity and equity in private enterprises.
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All these characteristics clarify the concept of “capital”, which means the
material conditions of the life of society, the development of production and
social infrastructure, which forms market value and characterizes the efficiency
of economic activity.
The modern approach to capital issues is based on the postulates of
classical political economy, guided by the fundamental principle, the essence of
which is that in any socio-economic formation, social production is based on the
use of means of production, objects of labor and labor. That is why in modern
economic literature there is no single definition of capital, but in practice there
are many different interpretations of it. Among all known approaches to capital,
the most meaningful is the definition that belongs to one of the founders of
classical political economy, K. Marx: “Capital can be understood only as
movement, and not as a thing that is at rest, which manifests itself in the form of
money, divided into income and investment. Thus, surplus value manifests
money as capital” (Маркс, 1983).
In mercantilist theory, the concept of “capital” is invested with a different
content. Mercantilists believed that capital is a self-increasing value. At the
same time, they associated the accumulation of wealth with the sphere of
circulation without considering any labor costs associated with the creation of
goods.
A. Smith and D. Ricardo associated capital with labor costs. According to
A. Smith, capital acts as accumulated labor, D. Ricardo believed that capital
serves as a means of production, physiocrats considered land as capital (Попов,
2007).
In modern Western economic literature, various interpretations of the
concept of “capital” are also found. P. Samuelson, D. Begg, S. Fisher,
R. Dornbusch define it as capital goods produced by the economic system itself,
used as production factors for the further production of various goods and
services. According to their theory, such capital goods can appear in the form of
stocks of production goods and function for both long and short periods of time.
W. Baumol and A. Blinder define capital as reserves (stocks) of an
enterprise, equipment and other production resources owned by firms or other
organizations. A similar position is held by McConnell & Brue (2006), who
understand by capital the concept of man-made resources used to produce
goods; goods that do not directly meet human needs.
J. Robinson connects the concept of capital with money. She believes that
capital, when not invested, appears in the form of cash.
According to the definition of K. Marx, “capital is self-reproducing value
that is included in the continuous process of circulation: money capital turns into
production capital, the latter turns into commodity one, which is again ready to
take the monetary form” (Маркс, 1983).
Understanding capital as an economic category, physiocrats subdivided it
into main and circulating. F. Quesnay believed that the initial advances make
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their turnover for several production cycles and transfer their value to the
finished product in parts. A. Smith laid the basis for dividing capital into fixed
and circulating capital a sign of physical immobility or mobility of various parts
of capital. To the physically motionless, he ranked buildings, machinery,
structures that are stationary and do not enter circulation in the production
process; physically mobile include: raw materials, money, finished goods.
According to D. Ricardo, fixed capital is that part of functioning capital that is
more durable and slowly wears out; the other part of the capital, which is often
reproduced, relates to working capital. Karl Marx called capital that partly
transfers its value to the finished product, and circulating capital, capital that
transfers its value to the finished product in one production cycle.
Based on theoretical experience, we believe that capital is property that has
its value, is in limited quantity and is capable, by changing its form, to capitalize
and create additional material benefits. Many modern economists are more and
more inclined to the need to adjust the positions of their predecessors, which
allows a deeper look at the fundamental issues of capital theory.
So, O. Veretennikova defines the capital of an economic entity as “money
capital attracted by an enterprise from the capital market from the budget and
created by the enterprise itself, through which property is formed for doing
business” (Веретенникова, 2004).
I. Goncharenko, I. Blank, V. Bocharov, M. Knysh is of the opinion that
investment is capital intended to produce goods and services. At the same time,
the capital gain should be sufficient to compensate the investor for refusing to
use his own funds for consumption in the current period, reward him for the risk
and compensate for losses from inflation in the future period.
According to Keynes, savings and investments are identical and should be
equal, since each of them is equal to the excess of income over consumption
(Keynes, 1936). We believe that savings are only the initial part of the
investment process, since not all savings become investments. Investments can
only be those savings that are aimed at expanding production to increase capital
and generate income in the medium or long term.
In Russian law, the concept of “investment” is considered in a broad sense
and is presented in the form of capital investment, which includes the costs of
building facilities, expanding, reconstructing and re-equipping existing
enterprises, acquiring machinery, equipment and material assets invested in
various types of activities with the purpose of profit or social effect. In our
opinion, the concept of “investment” is broader than the concept of
“investment”, since investment is an investment in capital with varying degrees
of liquidity with the aim of further incrementing and increasing the value of an
economic entity.
In our opinion, capital is an objective economic category that a business
entity has to carry out its investment activities in order to expand the scale and
value of the business, make profit and increase its investment attractiveness.
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In economic theory, it is customary to attribute investment forms to their
specific types by source, volume and purpose, and the direct process of forming
new capital, which ensures the increment of real capital, is usually called an
investment or an investment process. At the same time, in financial theory,
investment is understood as investment in real or financial assets to obtain
investment income in the future. The emergence of financial investments is
associated with the emergence of specific financial markets (Воротилова и др.,
2013).
Summarizing the above approaches to the definition of investment, we can
distinguish their main characteristics:
- investments can generate income
- investments can be directed to capital, current and intangible assets
- investments are urgent
- investors (the main participants in the investment process) while investing
can pursue the goal of obtaining economic benefits or achieving social benefits
- the investment process is probabilistic in nature since the expected return
is closely intertwined with investment risk
In modern economic conditions, under the influence of external and
internal factors, the nature and forms of investment, the criteria for evaluating
the effectiveness of investment projects are changing, the need for developing
measures aimed at increasing investment attractiveness at any level of the
economic system is growing.
The study of the essence of investment attractiveness in various aspects of
the manifestation was carried out by many modern scientists. In recent years,
more and more economists have been paying attention to the need to study the
external and internal criteria for assessing investment attractiveness at any level
of the economic system. The emerging transformations in the domestic economy
are manifested in a constant change of criteria, which makes the problems of
studying the nature of investment attractiveness truly relevant. The theoretical
approach is an attempt to explain the need to determine the factors that shape the
investor's idea of the feasibility and effectiveness of investing in objects, to
determine the criteria that affect the return on capital of a business entity.
The category “investment attractiveness” remains an occasion for scientific
discussions, since in the economic literature to date, a holistic view of the
content of this concept is not given. In economic publications, the term
“investment attractiveness” is considered identical to several similar concepts:
“market attractiveness”, “investment climate”, “investment image”, and
“investment potential”. However, they cannot be considered synonyms.
Market attractiveness is understood as partnerships between contractors, a
characteristic of the location and location of business entities. The experts of the
Rating Agency ‘Expert’ rating agency identify the concepts of “investment
attractiveness” and “investment climate”, while identifying two important
characteristics in them - investment potential and investment risk. However, we
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do not share their point of view and agree with V. Kretinin (Кретинин, 2004),
who notes that the willingness of investors to invest in a state depends on the
investment climate existing in it. The concept of “investment climate” reflects
the degree of favorable situation in a given country (region, industry) with
respect to investments that can be made in a country (region, industry)
(Подшиваленко и Киселева, 2005).
It follows that the concept of “investment climate” is a combination of
economic, political, financial conditions that affect the influx of domestic and
foreign investments into the country's economy. Investment potential is a
comprehensive reflection of various aspects of the investment climate in
investor perceptions.
It can be considered that the category “investment attractiveness” is a
component of the investment climate, which is objective in nature and excludes
subjectivity.
A variety of views on investment attractiveness requires clarification of its
content. In a broad sense, the concept of “investment attractiveness” describes a
system of economic relations between business entities, ranking criteria for the
effectiveness of investment processes, assessing and forecasting the
attractiveness of individual potential investment objects.
Until now, in the economic literature, due to the constant changes in market
factors of the economic system, a unified approach to determining the essence of
the concept of “investment attractiveness” has not been developed. Researchers’
opinions about investment attractiveness are largely divergent.
In modern Russian literature, investment attractiveness was studied by
M. Kreinina, E. Krylov, V. Vlasova, M. Egorova, I. Blank, V. Mashkin,
G. Bierman, S. Smidt, A. Krutik, D. Endovitsky, E. Nikolskaya, V. Bocharov,
M. Stanekova.
According to M.N. Kreinina (Крейнина, 2005), investment attractiveness
depends on all indicators characterizing the financial condition and affecting the
return on capital of the enterprise, the rate of its shares and the level of
dividends.
E. Krylov et al. (Крылов и др., 2003) consider that investment
attractiveness is “an economic category characterized by the efficient use of the
enterprise’s property, its solvency, financial stability, its ability to self-develop
on the basis of increasing capital profitability, the technical and economic level
of production, the quality and competitiveness of products… However,
narrowing the problem, according to researchers, investment attractiveness is
formed due to the competitiveness of products, customer focus of the enterprise,
expressed in the most complete satisfaction of consumer requests. “Equally
important for enhancing investment attractiveness is the level of innovation in
the framework of the strategic development of the enterprise.”
At the same time, I. Blank (Бланк, 2007) believes that the main
components of investment attractiveness are a generalizing characteristic of the
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investment qualities of an object and are evaluated by an investor. In his
opinion, investment attractiveness to a greater extent reflects the focus on the
development of the investment policy of the enterprise and allows us to consider
it as one of the factors in making an investment decision. One of the main stages
in the development of the investment policy of an enterprise, setting the most
effective ways to use capital while investing, is to identify individual areas of
investment activity. In this case, the investment object is evaluated, as well as
the main factors affecting it. I. Blank claims that investment attractiveness is in
direct connection with the stages of the life cycle of the enterprise.
V. Mashkin (Машкин, 2007) understands investment attractiveness as the
existence of investment conditions that affect the investor’s preferences in
choosing an investment object.
According to Bierman & Smidt (2006), investment attractiveness is
represented by a set of indicators that characterize the financial condition of the
enterprise.
D. Endovitsky (Ендовицкий, 2003), A. Krutik and E. Nikolskaya (Крутик
и Никольская, 2000) agree that investment attractiveness is a general
characteristic of all the shortcomings and advantages of the enterprise in
question.
V. Bocharov (Бочаров, 2000) considered the analyzed term from the
position of the securities market and determined the investment attractiveness by
the reliability of the securities issued by this enterprise.
M. Stanekova (Станекова, 2007) believes that investment attractiveness is
the presence of an economic effect (income) from investing free cash in
corporate securities with a minimum level of risk. Investment attractiveness can
be assessed using market activity indicators.
The approach of A. Syomin & A. Kibirov (Сёмин и Кибиров, 2013) is
interesting, which represent investment attractiveness in the form of two
conceptual positions: “…the first interprets investment attractiveness as a
characteristic of the level of favorable economic conditions for investments”.
According to scientists, the country, the federal okrug, oblast, krai, industry,
enterprise, and business entity may have investment attractiveness. “The second
conceptual position characterizes investment attractiveness as a set of
organizational, credit, financial, economic and legal conditions that determine
the choice of an investment object for investors to invest in order to obtain any
benefit.” The authors believe that investment attractiveness is considered as a
subjective assessment by an investor of a particular investment object from the
point of view of the appropriateness of investing (Сёмин и Кибиров, 2013).
An integrated view of the essence of investment attractiveness is that most
researchers distinguish it as an independent economic category, which is a
cumulative characteristic of the investment potential of a business entity,
reflecting the effective use of investment objects.
84
A review of various views and approaches to determining the category of
“investment attractiveness” allows us to argue that it is a system of economic
relations between business entities regarding the effectiveness of the
development of an investment object. The scientific community has developed
different approaches to identifying, evaluating, and analyzing the investment
attractiveness of the region, individual industries, and areas of economic
activity. Many authors, including M. Kreinina, E. Krylov, V. Vlasova and
M. Egorov, reflected the essence of the concept rather generalized and did not
determine the investment attractiveness from the point of view of investors. The
systematization of various approaches and points of view to understanding the
economic content of the considered category of “investment attractiveness”
made it possible to reveal their ambiguity due to the processes taking place in
various economic systems with different investment potentials and investment
risks. In particular, the definition of V. Bocharova and M. Stanekova is suitable
only for analysis of stock market enterprises. Interpretation of G. Bierman and
S. Smidt, V. Mashkin, I. Blank includes only one component of this concept,
which is, in our opinion, insufficient. Definition of A. Semin and A. Kibirov
seems truly clear and voluminous, fully reflecting the essence of investment
attractiveness. This definition can be used as the main, generalizing all the
above.
Based on the study and comprehension of different approaches to the study
of investment attractiveness and the criteria that determine it, we proposed an
authors’ brief description of the concept of “investment attractiveness”:
- it is advisable to consider investment attractiveness at all levels of the
economic system — state, regional, industry, level of business entities
- investment attractiveness is an independent economic category — a set of
external and internal factors, as well as qualitative and quantitative indicators of
the investment potential of any level of the economic system
- assessment of investment attractiveness at all levels of the economic
system is carried out in the current period (analysis of the current situation) and
the forecast period (forecast of the investment market).
Analysis of investment attractiveness at the state level is carried out based
on the following factors:
- political situation in the country
- the level of socio-economic development of the country and the standard
of living of the population
- macroeconomic indicators characterizing the state of the country's
economy (GDP, GDP per capita, gross capital formation, investment in fixed
assets, financial investments of enterprises and organizations, foreign
investment, commissioning of fixed assets, amount of work performed under
construction contracts, etc.)
- macroeconomic indicators providing a favorable investment climate (real
interest rate on loans, refinancing rate, money supply M2, share of M2 in GDP,
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share of cash in M2, foreign exchange reserves, consumer price index, producer
price index of industrial products, official US dollar rate to national currency,
etc.)
- The regulatory framework in the field of development of economic
relations
- the perfection of tax legislation.
The forecast for macroeconomic development is based on expert and
statistical assessment of the following factors:
- assessment of political risks
- Prospects for tax regulation of investment and entrepreneurial activities
(benefits and tax burden)
- prospects for the development of monetary policy
- promising state programs for the development of the country’s economy
and individual areas of economic activity (priority areas of budget financing)
- Prospects for the development of the financial market.
The investment attractiveness of the region is a combined characteristic
from the perspective of the investment climate, the level of infrastructure
development, the nature of investment risks. The analysis and forecast of the
regional economy are based on the following indicators:
- gross regional product and its share in the country’s GDP
- the availability of qualified personnel
- development of transport, information, and management infrastructure in
the region
- the proportion of unprofitable city-forming enterprises in their total
number in the region
- index of physical volume of investments in fixed assets
- sectoral structure of investments in fixed assets by region
- demographic characteristics (the proportion of the region’s population in
the total population of the country, the ratio of urban and rural residents, the
proportion of the employed population, skill level)
- the level of development of market relations (the proportion of state and
municipal enterprises, the number of enterprises with foreign investment, the
number of banks, stock exchanges, insurance companies, etc.)
- level of state support for the region (level of redistribution of budget
revenues, state lending, tax benefits for regional and local taxes).
In the context of industry, the analysis and forecast of investment
attractiveness is based on the following factors:
- the level of intra-industry competition, characterized by the total number
of enterprises and the number of monopolistic enterprises
- the level of social tension, characterized by the ratio of the average wage
in the industry to the cost of living
- the level of state support for the industry, technical and economic industry
indicators (gross output of the industry and its share)
86
- industrial production index, in % to the previous year
- coefficient of renewal of fixed assets
- the coefficient of disposal of fixed assets
- the degree of depreciation of fixed assets
- profitability of products sold
- the proportion of profitable organizations
- phase of the industry life cycle
- social significance of the industry (number of employees)
- industry average rate of return
- payback period for capital investments in the industry
- share of state property.
Analysis of the investment attractiveness of business entities is based on an
assessment of factors affecting investment activity:
- demand for products
- availability of own financial resources
- the state of the technical base
- the profitability of investment in fixed assets.
The forecast of investment activity of the enterprise is based on the
following factors:
- assessment of the timing of the acquisition of fixed assets and their
average age
- assessment of the reasons for the disposal of fixed assets
- return on sales
- profitability of production
- return on invested capital
- the degree of depreciation of fixed assets
- level of construction in progress
- payback period
- energy and resource efficiency of production
- automation and mechanization of the existing production process
- introduction of new production technologies
- the possibility of creating new jobs.
Our idea of the investment attractiveness of all levels of the economic
system from the perspective of a systematic approach is shown in Figure 7.
The participants in the process of assessing investment attractiveness are
the main links of the economic system: the state, region, industry, and business
entity.
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