Not every investment is profitable

There would be no limits for Serbia if only investments in our country were higher. This is something that we have often been hearing from both politicians and economists. The statement makes sense because there is an evident and direct link between investments and the growth of gross domestic product (GDP).

However, the reality portrays a different picture and that is that investments are not always contributing to the growth of economic activity, as was shown in the analysis carried out by Svetlana Jelic from Macroeconomic Analysis and Trends (MAT) magazine.

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Her research covered the period 2011-2016 and it shows that, during the observed period, the efficiency of investments in our manufacturing industry was weak and that the marginal investment efficiency coefficient of was only 0.11% per annum. In translation, this means that the investment return was only 11 para (1 Serbian dinar = 100 para) per 1 dinar of investment.

It is especially interesting to note that in industries, that are considered to be strong and prosperous by the general public such such as tobacco, beverage production or pharmaceutical, the investment efficiency is rather small. This means that investments, made by the owner of the capital, failed to increase the gross added value, and even generated loss.

This loss should only be interpreted conditionally because the increase or decrease in gross added value, in accounting terms, is not individually identified as net profit or loss. The invested dinar in the tobacco industry generated a loss of 32 para per year, in the production of beverages 19 para, in the textile production 28 para, in the leather and leather goods production 26 para, in the basic metal production 36 para, in the non-metallic minerals production 29 para, and in the production of computers the loss was 18 para.

There is an explanation for the poor efficiency of investments per branch. In terms of tobacco industry, these products, due to a specific tax policy, are getting more expensive year after year, which reduces their demand. The weaker demand in recent years has undoubtedly affected the decline in consumption of beverages. It is also a well-known fact that manufacturers of basic textile fabrics, as well as tanneries, are not doing well, while their counterparts from the ready-made clothing segment are fairing somewhat better, because in their case, the investment returns 47 para per annum per 1 invested dinar.

The reason why the return on investment in the production of basic metals is so low lies in the fact that the construction sector has been in stagnation, because in this case, it is all about the inputs in that industry. In terms of the production of non-metal minerals the explanation is that, in the observed period, the US investor left the Smederevo Ironworks (Zelezara Smederevo). In the meantime, the situation has probably changed for the better. Computer production has a poor investment return because in the hardware segment we still have a low volume production, while in the software segment the situation is quite different.

“The activities in which investment efficiency is was negative, i.e. where the funds invested are not returned through the increase in added value, but, on the contrary, they generate loss pose a particular challenge for economic policy makers. These are: computer manufacturing, textile, pharmaceutical, tobacco, leather and metal industries. Potential factors that have contributed to the reduction of the efficiency of investments in these activities are transition-related changes, the major financial crisis in 2009 and, ultimately, wrong decisions, failed investments and irrational spending beyond economic criteria and real needs”, says Jelic.

A particular challenge is the food industry, which is currently at the bottom of the list in terms of the investment efficiency, is the investment return coefficient which stands at only 0.02, which means that only 2 para per annum are returned from 1 invested dinar. Another challenge is that the food industry has a large share in the manufacturing industry of 21.8%. It is also interesting that the pharmaceutical industry has very low investment efficiency of only 2 para per 1 invested dinar.

Svetlana Jelic states that the pharmaceutical industry lost its place in the international division of labour in the transition process and re-gaining this place requires extraordinary efforts. On the other hand, the production of chemicals and chemical products has significantly improved its investment efficiency which currently stands at 47 para per 1 invested dinar.

As a result of Fiat’s investment in the post-crisis period, the automotive industry has bolstered its investment efficiency and has a return on investment of 19 para per 1 invested dinar.

The production effects of invested capital are the most pronounced in the segments such as repair and assembly of machines and equipment, other manufacturing activities and the production of metal products, and they range 40 to 53 para per 1 invested dinar.

(Politika, 14.07.2018)



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