INTERNAL FUNDS AND CORPORATE-INVESTMENT IN INDIA

Several economists have argued that capital markets in less-developed countries are fragmented. Fragmented capital markets retard the efficient allocation of resources and force business firms to rely on internal sources of funds. Using firm-level data, the authors examine the importance of the accelerator, internal funds, and depreciation for investment by manufacturing firms in India. The results indicate that internal funds and depreciation have significant explanatory power in a sales accelerator model of investment and that there exists heterogeneity among firms in the link between internal funds and investment. In particular, internal funds are relatively more important for large firms and firms that produce luxury goods.