Evaluating investment projects in the presence of sectoral linkages1

In this paper we develop a framework to assess the economic impact of foreign investment projects. If investment projects interact with other industries in the host economy, either by buying inputs locally or by selling their own product to local downstream firms, they can create sectoral linkages. The expansion of upstream and downstream industries can feed back to the project's own industry leading to a further expansion of the local industry. We study the circumstances under which investment projects lead to the creation of sectoral linkages and characterize the factors that determine the project's welfare impact. We link analytical findings to case studies undertaken for the EBRD.     

Real option value and random jumps: application of a simulation model

This article studies how sensitive real option valuations are to incorrect assumptions about the stochastic process followed by the state variables. We design a valuation model which combines Monte Carlo simulation and dynamic programming and provides an appropriate framework to evaluate the effect of estimation errors on both the value of real options and their critical frontier. Although the model is flexible enough to value American-type options contingent on a wide range of stochastic processes, we focus on the analysis of the effect of stochastic jumps. We apply our model to the valuation of an investment in the car parts industry documented in previous literature. Our results clearly show that underestimating this type of jumps might lead to substantial misjudgements in a firm's decision-making processes. For instance, it may lead to profitable projects being rejected when jump diffusion is low, or negative expanded net present value projects being accepted.     

Real options analysis on strategic partnerships of biotechnological start-ups

Since there is a mismatch between long-term basic research and short-term financial markets, the dependency of biotechnology (biotech) start-ups on strategic partnerships with pharmaceutical companies is expanding more than on venture capital. The research objectives are to examine the difference between license-fee elements, try to determine the innovation valuation in strategic partnerships, and minimise the risk in partnership formation for both sides. A key concept is that a biotech start-up is defined as a portfolio of real options based on an entrepreneur's ideas about investment opportunity. Methodologies used are compound options and stochastic optimisation for innovative but risky projects. In conclusion, this paper tries to address a wider scope with a deeper theoretical grounding, by using the real options perspective for the valuation of innovation partnership, through a biotech license-fee case study for simulation. Furthermore, the real option valuation can be expected to improve open innovation from matchmaking to innovation partnership.     

Present bias and corporate tax policies

Two major forms of corporate tax policies are dividend and profits taxes. Based on conventional corporate theory, these tax policies distort the firm's investment decisions and decrease firm value. However, this paper shows that under hyperbolically discounted preferences, dividend taxation is capable of boosting firm investment in a value‐enhancing way. The hyperbolically discounted present value can be interpreted as reflecting irrational myopic preferences or, as we demonstrate, reduced‐form implications of corporate agency issues. Both cases result in an underinvestment problem for the firm, but the firm valuation criteria differ. The optimal taxation issue is discussed under a Cobb–Douglas production function setting.     

Learning in,through, and about participatory technology assessment: the case of Nanotechnologies for Tomorrow's Society (NanoSoc)

In participatory technology assessment (pTA), technical and nontechnical communities convene to share their views on a sociotechnical challenge, in an attempt to render technology research and development more socially robust. Taking these commitments to transdisciplinary collaboration and co-construction of technology as entry points, this article describes key tensions that emerged in a Flemish pTA project on nanotechnologies, entitled ‘Nanotechnologies for Tomorrow's Society’ (NanoSoc). The tensions relate to how the terms of participation were enacted, the potentially conflicting aims embedded in the project's mission and methods, the various roles initiating pTA researchers (social scientists) assumed throughout the project's duration, and the deliberative-democratic rationale that sustains pTA frameworks at large. The article is a response to a pressing question posed to the author by pTA professionals, project participants and policymakers who ask publics to partake in science and technology decision making: now that NanoSoc is concluded, what can we learn from it?     

Testing the Option Value Theory of Irreversible Investment

This article statistically tests the option theory of irreversible investment. Using contingent claims valuation, we derive the value of options to invest in capacity, where the projects are endogenous to the economic circumstances prevailing at the investment date. We then test whether decisions made by Canadian copper mines are compatible with the trigger price implied by the theory. Our model explains investment size and timing satisfactorily from a statistical and an economic point of view; simulations with a mean-reverting process suggest that the results do not depend crucially on the assumption that price follows a geometric Brownian motion.     

Specific investment,relational governance and cooperation risk: from the perspective of farmers in China’s “Company+Farmers” alliance

The ‘Company+ Farmers’ alliance is the main organization for China’s agricultural industrialization management. Based on the survey data of farmers cooperating with companies in Guangdong and Jiangxi Provinces, this article explores the relationship among farmers’ specific investment, the relational governance of the alliance and farmers’ cooperation risk. The results show that the relational governance of the alliance can be divided into cognitive relational governance and coordinated relational governance. Among these types, cognitive relational governance can significantly promote farmers’ specific investment. However, with the increase in farmers’ specific investment, farmers’ cooperation risk is significantly improved, and the coordinated relational governance can significantly enhance the role of farmers’ material-specific investment in promoting cooperation risk. Therefore, agricultural enterprises can use cognitive relational governance to encourage farmers’ specific investment, and the specific investment of farmers must rely on a contract governance mechanism.     

Embedding effects in choice experiment valuations of environmental preservation projects

This paper addresses the question, whether attribute values derived from a CE study of one nature restoration and preservation project depend on the overall scale of nature preservation activities in which it is embedded. A split-sample CE study was undertaken in which a particular nature preservation project was evaluated in three plausible and strictly different embedding contexts. Respondents' attention was drawn to a varying number of forthcoming substitute preservation projects to be implemented prior to the one in question. Results show that while WTP for the project in focus is sensitive to the presentation of substitute projects as such, there does not seem to be any clear and unidirectional relationship between WTP and the number of substitute projects. Furthermore, effects vary across the project's attributes.     

Bringing science to market: commercializing from NIH SBIR awards

We offer empirical information on the correlates of commercialization activity for research projects funded through the US National Institutes of Health's (NIH's) Small Business Innovation Research (SBIR) award program. Based on this analysis we suggest possible recommendations for improving this aspect of the performance of NIH's SBIR program. Specifically, we estimate a model of the probability of commercialization as a function of the project's ability to attract additional developmental funding, along with other control variables. We find that additional developmental funding from non-SBIR federal sources and from own internal sources are important predictors of commercialization success, relatively more so than additional developmental funding from venture capitalists. We also find, among other things, that university involvement in the underlying research increases the probability of commercialization. Thus, these factors should be considered by NIH when making awards, if increased commercialization is an objective.     

Valuing investment projects under interest rate risk: empirical evidence from European firms

In this article, we perform an empirical investigation of the effect of the interest rate uncertainty on the valuation of investment projects. The analysis is carried out by employing a real option approach and by considering a set of firms that operate in various production sectors in the euro area. In particular, the revenues generated by the investment projects are modelled using a geometric Brownian motion, whereas the interest rate is specified as a stochastic process of Vasicek type. Moreover, using the volatility of the equity return as a proxy, the volatility of the revenues is calibrated to real firm data, while the parameters of the interest rate model are estimated by fitting the Euribor time series. To this aim, an ad hoc calibration procedure is developed which is based on the maximum likelihood principle and thus has the merit of being simple, fast and suitable for practical purposes. Our study reveals that the interest rate uncertainty reduces the valuation of investment projects. However, stochastic interest rates do not provide a substantial improvement with respect to constant interest rates, or at least the differences are not statistically significant.     

The Wicksell-Tobin investment model

We formalize in this paper Wicksell's investment decision model and compare it with Tobin's q-theory. Wicksell's firms either compare the natural rate of interest with the prevailing market interest rate or the capital values with the replacement costs of investment projects. This exposition of Wicksell's approach reveals some striking similarities with Tobin's supply-price-of-capital model, which relates the marginal efficiency of capital to the rate of return required by portfolio investors in the well-known q-ratio. The ratio market value to replacement cost of capital should, therefore, more appropriately be termed the Wicksell-Tobin q. Our formalization of Wicksell's investment theory appears to open up a promising new avenue for further research in cases where banks provide the source of funds.     

The Economy After the Budget, 1977–78

In summary, several important developments have occurred in recent months which affect the prospects for mining investment in Australia in the immediate future and in the medium-term. Of particular importance are the Commonwealth government announcements regarding the North West Shelf Natural Gas project and the various changes to tax provisions announced at the same time, and the presentation of the government's new uranium policy. These recent announcements make it more likely that Investment In the North West Shelf project as well as in uranium mining projects will proceed in the period to 1980-81. Recent developments in overseas economies and particularly In Japan are likely to have the effect of shifting some planned investment in mineral development projects further into the future. It now seems likely that investment in coking coal and iron ore projects in the period to 1980-81 will not reach amounts expected earlier, and that this shortfall will more than offset any more rapid investment in uranium projects. We therefore consider that the projections of aggregate mineral investment presented in Review 2'77 should now be revised downwards.     

MEASURING THE ECONOMIC VALUE OF VOLUNTEER WORK GLOBALLY: CONCEPTS,ESTIMATES, AND A ROADMAP TO THE FUTURE

ABSTRACT: This article explores alternative approaches for measuring the economic value of volunteer work, develops a methodology for producing global estimates of this value using existing data sources, and identifies a new data source that promises to yield significantly improved data on which to base such estimates in the future at both the global and national levels. Both volunteering through organizations and directly for individuals are considered. Different approaches to valuation, including the replacement cost, opportunity cost, and social benefits approaches and both observed and reported market proxies, are examined. Based on a number of criteria, the replacement cost method using observed market wages is recommended. Using this method, the article estimates that ‘volunteerland,’ if it were its own country, would have the second largest adult population of any country in the world, and would be the world's seventh largest economy. The article concludes by discussing a new International Labour Organization Manual on the Measurement of Volunteer Work that adopts the basic method for defining and valuing volunteer work outlined here and promises to generate a much more robust and coherent body of data on volunteer work than has ever been available both globally and nationally.     

Public Investment and Growth: testing the non-linearity hypothesis

This article explores the relationship between public investment and growth among 56 low and middle income nations during the 1980s. The theoretical grwoth iterature emphasizes that initial increments of public capital raise growth but, at some point, additional increments of public capital inevitably reduce growth by creating distortions in the private sector. Despite the provalence of the non-linearity hypothesis, the article undertakes the first econometric test of the hypothesized non-linear relationship between public investment and growth. The article's econometric analysis does not support the public investment non-linearity hypothesis. The article concludes that crowding out concerns may have been overstated in the literature.     

Foreign Direct Investment and the External Wealth of Nations: How Important Is Valuation?

While the balance sheet approach has increased the focus on position data, differences in valuation practices for foreign direct investment (FDI) make cross‐country comparisons difficult. To enhance comparability, the IMF's Balance of Payments and International Investment Position Manual, sixth edition, which some countries have already implemented and others will implement in the coming years, recommends seven methods for valuation of unlisted FDI. This paper demonstrates that both the valuation method and simple differences in estimation techniques can fundamentally change a country's financial balance sheet. Using Denmark as an illustration, unlisted FDI equity liabilities vary from 22 to 156 percent of GDP when applying different estimation techniques, but just one valuation method, price to earnings. These measurement uncertainties can lead to important misunderstandings and affect policy recommendations, thus pointing to the need for further international harmonization. While the results are presented in an FDI context, the uncertainties also apply to other macroeconomic datasets, including national accounts statistics.     

The Nation's Private Wealth -Some New Calculations for Australia*

This paper has two related purposes. The first is to bring together and review a number of earlier studies which have attempted to estimate the value of Australia's privately held wealth stock. The second is to present new estimates covering the 1980s. based partly on these earlier studies, which value all major components of the nation's private wealth at their market value, or a close approximation. The calculations reported here represent the first aggregate Australian wealth series for which comprehensive market valuation can be claimed. Australia's aggregate non-human private wealth was found to be $794 billion at 30 June 1985. The series as a whole suggests that previous estimates have significantly under-valued Australia's wealth. At 30 June 1981 the Helliwell-Boxall (1978) study. updated by the Reserve Bank, reported a value of $294.7 billion, while Williams (1983) gave a value of $360.5 billion. The corresponding estimate for the new series is $532.5 billion. Because the new calculations presented here value wealth by component. it is possible to identify omissions and valuation differences which account for most of the variation between these estimates.     

A Theory of Conflicts of Interest in Banking Relationships

Abstract

This paper highlights a dark side of banking relationships by elucidating the conditions under which a pre-existing relationship between a lending bank and a borrower can be detrimental to positive valuation effects of loan announcements. The effect of a pre-existing relationship is more likely to be negative when the pre-existing loans are large and firms' screening costs are low. A theoretical model shows that loan announcement's positive effect on borrowers' value due to the standard information advantage can be more than offset by the bank's conflict of interest when the bank's asset quality reputation is poor, i.e. when the probability of the bank holding a bad loan is large.     

Japanese Consumption,External Disequilibrium and their Statistical Measurement

Georgescu-Roegen's work is usually divided into two categories, his earlier work on consumer and production theory and his later concern with entropy and bioeconomics beginning with his 1966 introductory essay to his collected theoretical papers published in the volume Analytical Economics. Most economists usually praise his earlier work on pure theory and ignore his later work which is highly critical of neoclassical economics. Those economists sympathetic to his later work usually take the position that he “saw the light” and gave up neoclassical theory some time in the 1960s to turn his attention to the issues of resource scarcity and social institutions. It is argued here that there is an unbroken path running from Georgescu's work in pure theory in the 1930s, 1940s, and 1950s, through his writings on peasant economies in the 1960s, leading to his preoccupation with entropy and bioeconomics in the last 25 years of his life. That common thread is his preoccupation with “valuation.” The choices our species makes about resource use and the distribution of economic output depends upon our valuation framework. Georgescu-Roegen's work begins in the 1930s with a critical examination of the difficulties with the hedonistic valuation framework of neoclassical economics, moves in the 1960s to the conflict between social and hedonistic valuation, and culminates in the 1970s and 1980s with his examination of the conflict between individual, social, and environmental values. This paper traces the evolution of Georgescu-Roegen's thought about valuation and the environmental and social policy recommendations which arise out of his bioeconomic framework.     

Valuing water quality improvement in China: A case study of Lake Puzhehei in Yunnan Province

Even though surface water has been polluted almost everywhere in China, few economic valuation studies have been conducted to value water quality changes. This paper reports an economic valuation study conducted in Yunnan, China, which estimates the total value of a real investment project to improve the water quality of Lake Puzhehei by one grade level. Located in Qiubei County far from big cities, the lake has been experiencing rapid water quality deterioration in past several years. Based on the multiple bounded discrete choice approach, an average household in Qiubei County is estimated to be willing to pay 30 yuan per month continuously for 5 years for the water quality improvement by one grade level, roughly equivalent to 3% of the average household income. The elasticity of willingness-to-pay with respect to income is estimated to be 0.21. The economic rate of return of the proposed project is estimated to be 18%, indicating an economically favorable investment in water quality improvement. This study also demonstrates that the previous knowledge about the water quality changes and about the project can have significant positive impacts on people's willingness to pay, whereas the interviewer effect on valuation can be negative.     

Overseas Impacts of China's Outward Direct Investment

China's outward direct investment (ODI) has grown rapidly since 2004. But along with such phenomenal growth is a mixed feeling toward Chinese investments in host countries. This article explores some overseas impacts of Chinese ODI based on an analysis of China's policy environment and investment patterns. We argue that what Chinese investors bring to host economies includes (i) massive job creation, but limited technology transfers to the local economy; (ii) ample capital as well as entry into the Chinese market; and (iii) damage from corporate social misbehavior. However, we suspect that these overseas impacts may be transitory as three dynamics, increased conflicts, accelerated learning and China's domestic structural changes, are simultaneously set in motion.