Investing in Turbulent Times: The Investment Behavior of Polish Firms in the Early Transition

We examine the investment behavior of a sample of Polish industrial firms over the period 1991–1993 by means of a model that views investment flows as part of the firm’s effort to adjust its assets and liabilities so as to maximize the returns to the firm. We argue that the application of neoclassical models of investment is more appropriate in cases where net investment is positive and where the returns to other assets and costs of liabilities are stable. If firms are seeking to reduce their capital stock, then the major constraints are not financial but rather set by the speed of physical depreciation. If the returns to other assets or the costs of liabilities change, then the firm will be forced to reconfigure its balance sheet in a way that may be inconsistent with the neoclassical model of investment. This paper examines the adjustments undertaken by Polish firms and shows that firms that did make positive net investments in this period were influenced by their capital intensity, profitability and by their costs of and returns to financial assets. The explanatory power of the model is relatively high when compared to previous studies of the investment behavior of firms in the early years of transition.