Since 1973 European Economies have faced a period of slow growth aggravated by a new recession in 1980 which has dramatically increased unemployment. It has also particularly affected investment whose volume declined in absolute terms between 1979 and 1983.

Whilst in the period of rapid growth, exports and investment were the driving forces of expansion, however in the mid 70’s growth was sustained rather by public and private consumption. But since then public deficits have constrained governments to adopt austerity policies reducing their expenditures and slowing down as much as possible transfers to households.

Simultaneously, the weakening of firms’ financial situation has led governments to endeavour to render the distribution of value added more favorable to profits, which has brought pressure on real wages. This, together with limitation on the volume of transfer payments, has eroded consumer’s purchasing power.

These policies have been quite effective in terms of inflation rates and external deficits. However, the medium term prospects for unemployment remain around 10%, if not more, of the active population.

Foreign investment involves transactions which can be described by six dimensions : (1) the financing package, (2) the level of utilization of resources to be employed in the project, (3) the import content of factors needed in the equipment of the new plant, (4) the import content of inputs needed in production, (5) the production mix and (6) the proportion of repatriated profits. This paper aims at developing a two-commodity flexible price and quantity model which recognizes these central characteristics, and exploring the nature of macroeconomic responses to foreign investments in a small open economy.

The analytical results give conditions for welfare and balance of payments improvements for the general case and, as a by-product, for the corresponding Keynesian fixed-price or classical fixed-quantity model. It is shown how they crucially depend upon a set of parameters among which the degree of substitution or of complementarity between domestic and foreign production in the host country plays a key role. Most of these parameters are identifiable in either the empirical literature or in existing econometric models, which permits empirical verification and country comparison. On the basis of Dutch and Spanish data, the results support the evidence of a current account deficit in both countries and of minor welfare improvement for the Netherlands but substantial welfare gain for Spain.

Daniel Weiserbs has produced a very interesting model of investment behaviour in the six major countries of the EEC. As is usual in econometric studies he has had to steer a careful course between what is feasible and what is desirable. In particular for this study the data constraints are severe, since the data are annual and only for a 21 year period. In view of such constraints it is very important to have a clear economic interpretation of the coefficients to be estimated and in this paper we are supplied in most cases with a convincing story.

The model is however derived in a fairly ad hoc manner and this can sometimes have the disadvantage of hiding the full implications of the assumptions made. For example we know from work by Lucas (1967), Gould (1968) and others that if we assume that an industry or sector acts, as a whole, like a representative profit-maximizing firm with costs of adjusting its capital stock, then the use of a partial adjustment mechanism as specified in equation (6) implies that the representative firm has static expectations – that is future growth, as seen from a point in time, is expected to remain constant for all time into the future. Now since the expectation of growth one period ahead is in fact specified to be equal to growth this period, the model is implicitly assuming that, at each period, firms expect growth to continue at its present rate for ever – which must have been a depressing thought in 1981.

Very few issues can stir controversy and arouse passions as much as foreign investment (FI from now on) and Multinational Corporations (MNC’s). The literature on the subject is enormous. There are several grounds on which MNC’s are usually blamed: they are alleged to inhibit national entrepreneurship, discourage domestic saving, bring into the country inappropriate technology, reduce the amount of competition in the economy and worsen income distribution. There is of course considerable margin of disagreement on the single allegations and often the story being told runs precisely the opposite way. It is not always easy to compare different standpoints insofar as the previous arguments are sometimes difficult to formalize. While there are some noticeable exceptions in this respect (1), it remains true that formal models on the impact and the behaviour of MNC’s are indeed a relatively rare breed. As far as foreign investment is concerned, there is a considerable body of literature which has analysed the impact of FI mainly in the context of standard international trade models. It is perhaps useful to recall some of the main theoretical results. In a one-sector model with no distortions, an infinitesimal inflow of foreign capital will leave national welfare unchanged provided capital earns its marginal product. If we consider instead a finite inflow, this will raise domestic welfare insofar as the country will appropriate the surplus below the marginal productivity of capital schedule (2). As far as the two-sector neoclassical model of trade is concerned, foreign capital will have no effect at all unless it forces specialization on the economy. If however distortions are introduced, the results change dramatically. For instance, in a small tariff-imposing economy a capital inflow from abroad will, if profits are repatriated, reduce national welfare.

Usual approaches to the investment decision of the firm consider either that the firm is always constrained on its output sales or that it never faces any constraint at all. The paper is an attempt to enlarge this traditional framework in two directions. First by combining the two previous standpoints and by considering that the firm is sometimes constrained on its output (effective demand) and sometimes not constrained at all (notional demand); next by including other kinds of constraints as well, like a credit or a labor constraint. The outcome is a distinction between five possible «regimes», corresponding each to a different explanation of observed investment.

Multinational corporations and import competition assume high profiles in economic policy debates in both Canada and France. An initial glance at the structure of foreign direct investment and trade in these two countries also indicates certain similarities. The openness of the Canadian and French economies to international trade is quite comparable, while such industries as petroleum and natural gas, pharmaceuticals, and para-chemicals head both countries’ lists of the sectors with the largest shares of foreign controlled sales and assets. In addition, there is a relatively high correlation coefficient of .603 between the inter-industry measures of foreign direct investment in the two countries (based on the sales data used in this study), while the correlation between the sum of their import and foreign subsidiaries’ shares (total foreign penetration) is .489.

Irrespective of Malinvaud’s theoretical considerations about profitability (see Malinvaud (1980 and 1982)), this paper is, together with a companion article of Gérard and Vanden Berghe (1984), the second paper I am aware of dealing with investment in disequilibrium situations.

The first paper is one of Nishimizu, Quandt and Rosen of Princeton University, entitled; «The Demand and Supply for Investment Goods: Does the Market Clear?», (1980) (not yet published), in which they apply the popular Maddala-Nelson Maximum – Likelihood Procedure (see Maddala and Nelson (1974)) to estimate the model parameters for a postwar quarterly model on Japanese manufacturing data. They specified and estimated a model of the market for investment goods alone, that explicitly incorporated a supply side and that allowed for the possibility that this market might not clear instantaneously. The most striking results were that the long run Japanese supply curve of investment goods is virtually horizontal, and that the Japanese investment market appears to be characterized by equilibrium.

And now comes this second paper, but also allowing for possible rationing on the output, labour and credit markets.

The work presented by Robert Owen and Pascal Auburtin represents a welcome contribution to the empirical research on the determinants of foreign direct investment. Very few studies have looked at the pattern of foreign direct investment in continental European countries, or have dealt with foreign investments other than by U.S. corporations. By concentrating their research on France the authors have filled some of this gap.

During the last twenty years there has been an increasing tendency to derive firms’ decision rules from explicit inter-temporal optimizing models. Such quests for choice-theoretical foundations has been regarded both as logically necessary and empirically fruitful in specifying the equations describing input demand, production, pricing and inventory accumulation. In the more recent past the research in this area has followed different directions. A group of studies has relied on the introduction of convex adjustment costs to justify the forward-looking nature of input demand decisions and has analyzed the implications of the rational expectations assumption in this context. The papers by Sargent (1978), and Nickell (1984) on employment, by Abel (1980) on investment, and by Meese (1980) on both are representative of this approach. The papers by Pindyck and Rotemberg (1983a), (1983b) proceed from the same assumption but differ from the rest because the first order conditions of the maximization problems are estimated directly without obtaining a closed form solution for the firm’s decision rules. Another set of studies has instead developed the implications of the dual approach for factor demand, usually adopting the assumption of a cost-minimizing firm facing a putty-putty technology. The contributions by Jorgenson and Fraumeni (1980), and Berndt and Wood (1979), (1975), to mention just a few, belong to this category. A third group of studies has concentrated on prices and output decisions, disregarding the input demand aspect of the problem. Rotemberg (1982), (1983) and Maccini (1977), (1978) are good examples of this line of research. Finally, in Maccini (1981) and (1984) there is an attempt at analyzing investment in fixed capital and inventories together with prices and output decisions in the presence of convex costs in adjusting the capital stock.

Most of the emphasis and interest in negotiations and assessments concerning integration tends to concentrate on products rather than inputs. However, freedom of movement of products within the EC does not necessarily entail the absence of protection or completely free competition if there are still constraints on inputs. In the case of imported produced inputs, intermediate goods and services, the subject has been extensively explored with the measurement of effective protection. The differences between nominal rates and effective rates can be quite striking. If the EC’s Common External Tariff were 5% on a particular product while the CET on the main produced inputs, which form 50% of the production costs, is zero then the effective rate of protection is double the nominal rate (all other influences such as differential transport costs for the finished and intermediate products being ignored). Effective protection is thus the rate of protection of the value added in the production of the final product.

This paper is interesting and ambitious since it tries to provide both on the theoretical and empirical levels an integrated account of firm’s behaviour under the assumptions of an imperfectly competitive output market and of a putty-clay technology.

In my opinion subject to caution, if the author succeeds quite well at the theoretical level, the empirical results are more questionable.

One of the difficulties found in building an integrated model of firms’ behaviour is to take into account the different time horizons concerned by the firms’ enterprises.

The intertemporal characters of these decisions result from several factors:

Simple theory tells us that we cannot generally expect trade in finished goods to equalise the prices of untraded factors. Simple observation tells us that many factor prices do indeed display considerable and persistant international differences. The simple inference is that these factors are substantially non-traded. However, this raises more questions that it answers. Why are factors not traded? What is the impact of regulation on factor mobility? Does the operation of international trading communities affect factor mobility?

That article is part of an investigation on investment behaviour in Belgium both at aggregate and sectoral level. More precisely it aims to test the hypothesis that investors become more sensitive to expectations regarding future sales opportunities when the economic conditions are going down. Consequently the relative weight of that determinant of investment with respect to the so called notional determinant, i.e. here the real cost of capital, increases when business conditions deteriorate.

Indeed the application of standard investment functions, like the Jorgenson one – see a.o. Hall and Jorgenson (1971) – or the one due to Eisner and Nadiri (1968), to Belgian data suggests that the estimated coefficients not only vary from one sector to another but also strongly depend on the period on which they are estimated. However some economic logic seems to arise from that instability.

Therefore, in order to obtain more accurate predictions regarding the effects of a change in the cost of capital, e.g. a change in the interest rate or in tax parameters, or of a change in expected demand, a methodology is needed which captures that variability of the coefficients of the investment functions.

Capital utilisation and the physical stock of capital are generally assumed to be close substitutes in the production process. Thus, models of the demand for capital or of investment activity must, in principle, incorporate some notion of the optimal level of capital utilisation and its associated costs. The part played by capital utilisation in investment activity is the primary reason for this paper and it is argued that the literature in this area has tended to underemphasize its role. The discussion, however, focusses on the reasons for the lack of emphasis on capital utilisation and this is traced to both problems of theory and measurement. A simple neoclassical theoretical framework is adopted throughout, although it is fairly clear that a number of further problems will be posed by the introduction of capital utilisation into a vintage model. While the theoretical discussion is perfectly general, the empirical work uses data for the U.K. Chemicals industry, simply in order to illustrate the problems of measurement.

It has become customary to discuss the investment decision of the firm and the capital utilization decision separately. Both topics have commanded considerable attention in recent years (Nickell (1978), Betancourt and Clague (1981) provide good entry points in to the literature) and, at the informal level, the links between utilization decisions and investment decisions have been widely recognised. However, when considering investment decisions more formally, analysts often agree with Nickell that attempting to introduce a utilization dimension makes it « clear that even with just two factors, a specification of the production possibilities is quite tricky given that output will depend on the number of workers using the capital at any given time and also on the number of hours worked by each worker » (Nickell (1978) p. 145).

The authors derive some interesting conclusions about the relative importance of the cost of capital and output during periods of economic crisis and relative prosperity. In essence as a result of output constraints during periods of economic recession the level of output is seen to dominate the demand for capital goods with real cost of capital playing a minor role. These conclusion result from a theoretical development of investment behaviour that allows for the introduction of rationing when a sector is operating under an output constraint. The following points arise from a detailed study of the paper.

Initial experiments with standard investment functions of the Jorgenson & Eisner-Nadiri type give the familiar result that they are unstable. If attention is turned to the results presented in Tables 2 and 3 it can be clearly seen that elasticities and mean lags are very sensitive to small changes in the data set. This can be interpreted as indicating the severe problems of mispecification that are present but may also result from severe multicollinearity between the explanatory variables or the presence of an outlier in the data set. If the values of σ and μ are used to calculate v, the degree of homogeneity of the production function, it is worrying to find that it takes unrealistic values with a large number of estimates exceeding 2 and several exceeding 20. In addition, the interpretation of the mean lag should be treated with caution. The mean lag is meaningless if, as for some sectors appear likely from the information given, the value of βj alternate in sign. The use of the median lag may however overcome these problems.

In this paper we have a threefold objective. Firstly, to identify the principal macroeconomic determinants of U.K. private sector investment. Secondly, to examine the effects of private investment on aggregate supply. Finally, we attempt to integrate the effects of public sector investment and pricing on private sector output.

Investigators have modelled private sector or manufacturing investment behaviour in a variety of ways. The neoclassical tradition, associated with Jorgenson (1963), explains investment expenditures in terms of the lagged capital stock, expected output and a distributed lag on the cost of capital. The most recent effort along these lines on U.K. data is the paper by Bean (1981). Although he found significant negative effects of the change in interest rates and the real cost of capital on the change in investment he failed to obtain satisfactory estimates of long-run cost of capital effects on the level of investment. Thus investment was determined solely in relation to output in the steady state. Alternatives to the neoclassical formulation have been proposed in the form of the multiplier-accelerator model and Tobin’s q model, in which changes to the capital stock incur adjustment costs. The former, which have been widely used in macroeconomic models, have generally failed to predict turning points in investment. Oulton (1981) and Dinenis (1984) have had moderate success with q models for the U.K. The major difficulty encountered is that of rationalising the existence of a lag structure for q, the ratio of market value to the current replacement asset cost.

« First understand what you are trying to do » is always a good maxim. It is particularly important when what you actually want is not immediately obvious. This seems especially true with discussions of capital utilization, the concept of which, particularly in empirical models, is not always clear. Certainly Bosworth and Westaway identify different dimensions to capital utilization that are used by economists and it is not obvious that either of these corresponds to everyday usage. The present discussion, therefore, is an attempt to be precise about notions of capital utilization in order at least to provide a framework within which one can analyse the concepts involved and consider what measures are appropriate for empirical work.

There are few issues in the economics of the firm that have generated as much controversy and discussion as the measurement of profitability. Accountants remain sharply divided about the appropriate techniques for adjusting for inflation while in the background economists question the fundamental principles of accounting and fail to agree on whether informative indicators can be constructed at all (see Kay (1976), Fisher and McGowan (1983), Harcourt (1965), Kay and Mayer (1984) for a taste of this debate). Much of this discussion has been highly misconceived and it is a basic contention of this paper, as described in section I, that accounting figures are indeed relevant for answering a range of economically interesting questions and a desirable method of adjusting for inflation is both well defined and simple to apply in practice.

The conclusions of this paper are interesting and controversial. Its conclusions that the promotion of investment can only come about by means of reducing real wages, and, the public sector borrowing requirement means that Keynesian policies being recommended for the reduction of unemployment are inconsistent, in that increases in these two variables will lead according to the results of this model to a reduced level of investment, and hence a lower rate of growth of output, and a lower rate of job creation. These results being true in the short run as well as in the long run. In my view it has not been conclusively shown that these results are true for the British Economy, and I intend in the rest of my comments to explain my reservation about the model and its results.

As these results are derived solely from a view of the data obtained from their model, a first approach is to examine their model critically. At first the model seems unexceptable. In fact in many ways it embodies a degree of structure unusual in such a study. However, the structure is not complete, one could not expect it to be, and it is here that some problems may arise.

The investment equation is determined as one from a set of factor demand equations derived from profit maximisation subject to a KLEM technology. Output is somewhat curiously defined but for the moment let us pass over that and concentrate on the problem max