Uncertainty, profitability, and investment in Mexico

Résumé 0

The purpose of this paper is to distinguish between the corporate necessity of investing to create value and the discretion exercised to postpone investing because of higher uncertainty. The theory holds that investment is positively related to profitability and negatively linked with uncertainty. In Mexico, as in many other countries, there is still more uncertainty and less profitability after the economic crisis of 2008, but contrary to expectations, investment has maintained an upward trend. In this paper, a statistical comparison is performed using vector autoregressions on the quarterly data for Mexico. The evidence seems to suggest that, discounting uncertainty, only volume effect induces more investment regardless of the profit rate. The profitability indicator could reflect the effects of high market concentration, which has been a significant determining factor in other authors' estimates. We did not find evidence of incentives to invest resulting from an increase in profit rate. Therefore, the consumption or volume effect exceeds the profit rate impact on investment. The lack of domestic market dynamism does not contribute to the growing investment trend. I conclude that an economy with a low innovation propensity and a low interest rate creates conditions for investment to seek a higher total profit and not, necessarily, a higher rate of return. Although export firms have a greater propensity for investing and innovating, our evidence suggests that exports seem to crowd-out investment in the long-run.