To make a decision on capital investments, first of all, the investment background is comprehensively assessed, then the investment attractiveness of the business climate. Often these two concepts are considered identical, although this is wrong. The investment climate analyzes the investment environment both by territorial and by industry.
There are several definitions of the concept of investment climate. Some experts believe that this term is an indicator of the favorable situation that develops in a certain administrative-territorial unit in relation to potential capital investments in the objects of its socio-economic system.
Other methods for the climate of investors are called a set of a number of conditions (in the sphere of politics, culture, finance, economics, law and social security) that have developed in a state. The degree of their favorability affects the quality of the business environment, the effectiveness of investments and the level of probable risks in financial investment. This definition of climate allows us to include the climate for investors in such a factor for the company as one of the external and determining the preference of a potential investor regarding the project.
There are several more clarifying definitions of this concept, but all of them do not affect the investment selection criteria, for example, the risks determined by the IC. Therefore, the most meaningful and correct interpretation is given by the Financial and Credit Dictionary of the encyclopedic type.
According to the source, the investment external climate means circumstances in the socio-cultural, political and legal, as well as financial and economic spheres, formed in a certain jurisdiction and directly influencing the quality of the entrepreneurial base, the measure of productivity from investments, and the probable risks of capital investments. In other words, the IC is a balance of the effectiveness of investments and the risk component of the investment summary.
Formation of an investment climate that is favorable for increasing investment activity, primarily in the non-state sector.
State support for the most important life-supporting industries and the social sphere against the background of increasing the efficiency of capital investments.
Attracting private foreign and domestic investment for the purpose of reconstructing enterprises.
An unfavorable investment climate is one of many obstacles that underdeveloped countries face. Regulatory reform is often a key component in removing obstacles to investment. A number of non-profit organizations have been created with the aim of improving the investment climate and stimulating economic development in these countries.
In addition, some investors are willing to accept a high level of risk and instability associated with investing in an unfavorable climate because of the likelihood that high risk will be rewarded with high returns.
One of the difficult aspects of understanding and assessing the investment climate of a country or region is that governance is a broad concept that can be effectively applied in a variety of ways. There are also different types of governance, from political governance (the type of political system, constitutional arrangements, and relations between the state and society), economic governance (the institutions of government that regulate the economy, competition, property, and contract rights), and corporate governance (national and corporate laws and practices that govern corporate behavior, shareholder rights, disclosure, and transparency, accounting standards).
To complicate matters, each aspect of corporate governance plays against the other, so judgments about a particular investment climate must be made on a case-by-case basis.
Objectively, they are related to the investment climate that exists in a particular country. Subjectively, these opportunities depend on the existing investment image formed under the influence of real processes of entrepreneurship evolution, and special targeted incentives or actions that limit the inflow of foreign investment, both domestically and on the world stage.
In other words, those that create a favorable investment climate, namely:
High potential of the domestic market.
Low level of competition.
Acceptable cost of labor, financial, and raw materials.
Increased rate of profit.
Stable tax system.
Efficient government support.
Expansion of resource potential, development of the regulatory framework, and market infrastructure.
Development of special measures of government support, protection of investors (tax incentives, guarantees, subsidies, etc.).
The investment climate is assessed using special methods. Thus, for countries with a transitional type of economy, as well as for developing countries, the "Bery-index" method is used. This is a synthetic indicator, representing the sum of points of expert assessments of special indicator factors establishing individual aspects of the investment climate. Then, based on the results of calculations, countries are ranked, which is subsequently taken into account in the process of making an investment decision.
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