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Investment Decisions in Corporations Essay

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Updated: Apr 13th, 2021

In order to succeed in a competitive market, corporations need to pay much attention to their investment decisions to gain benefits and profits. The process of making effective decisions involves several steps, and it needs to be discussed in detail along with a list of options that are available to corporations for their investment (Trang & Tho, 2017). The purpose of this paper is to provide an explanation of how the majority of corporations make specific investment decisions to add to their profitability and competitive advantage.

The first step in the decision-making process related to investing in the analysis of a current situation with the help of certain tools, such as the cash flow analysis and the analysis of the cost of capital. These tools are important to indicate the current position of a corporation in the market, evaluate its attractiveness to potential investors, and influence its own investing decisions (Goodman, Neamtiu, Shroff, & White, 2013). The second step in the decision-making process is the identification of available options or perspectives in order to improve the discussed situation (Hori & Osano, 2014). Thus, financial managers and members of strategic teams in corporations focus on determining areas to invest in and increase capital.

These areas and options include possibilities for investing in their own business through purchasing assets, resources, and technologies and improving processes in order to make operations cost-efficient, as well as to make their products and services innovative. At this stage, managers in corporations choose the most appropriate assets and resources to invest in, and they plan to receive more revenues because of expansion activities, increased sales, and improved quality (Shroff, Verdi, & Yu, 2013). This approach is actively used by corporations when they do not focus on mergers and acquisitions as part of their strategy.

Another option to choose is the possibility to invest in other businesses, including suppliers, smaller companies, and start-up companies with a high potential for further growth. For example, large corporations often use their venture capital funds in order to invest in firms in the technology industry and receive financial gains in the future (Hori & Osano, 2014). This strategy allows corporations to expand their operations and enter new attractive and actively developing markets because these investment decisions are based on proper evaluations of the latest market trends, as well as on forecasts for the future.

One more option is associated with the investment in foreign industries and markets. Corporations usually choose to expand their activities in many foreign countries because of cost-efficient resources, low taxes, and attractive gains (Ding & Qian, 2014). The decision regarding opening foreign subsidiaries and investing in suppliers from foreign markets depends on the analysis of external environments that influence the development of the industry and competition in the selected country (Shroff et al., 2013). This type of investment decision is associated with investing in stocks, which often results in improving companies’ positions in the market (Ahmad & Anees, 2016). Moreover, corporations can also invest in hedge funds in order to increase their return on assets and improve the currently followed capital distribution strategy.

The third step that corporations should complete in order to make an investment decision is the assessment of options and their advantages and disadvantages. At this stage, managers concentrate on forecasting future cash flows with reference to their investments and the analysis of net present value (Trang & Tho, 2017). As a result of the conducted assessment, financial and strategic development managers in corporations choose those specific options and projects to invest in that are most attractive and potentially profitable for them.

From this point, to make effective investment decisions, it is important to evaluate projects or options for investing in relation to each other in order to receive a full picture regarding forecasted profits. After that, managers and financial experts prioritize options for investment depending on the analysis results. From this perspective, those managers who have developed skills in making financial forecasts and analysis to support investment can potentially make more efficient investing decisions (Goodman et al., 2013).

However, researchers also state that corporations should pay more attention to their investment decisions and the need for investing in order to avoid the problem of overinvestment that is typical of large companies rather than small private firms (Shroff et al., 2013). Thus, investing decisions of corporations are influenced by the fact that managers are often oriented to increasing companies’ investment levels.

The analysis of the scholarly literature on the problem indicates that managers in corporations follow a certain process in order to evaluate investment projects and options. Companies can choose from investing in their own business operations, in their suppliers and other companies in the market to receive a share, in foreign companies, in opening subsidiaries, in purchasing stocks, and in hedge funds. All these options are appropriate for different types of corporations, various environments, and specific market situations. Therefore, in order to make a proper investment decision, corporations concentrate on conducting detailed financial analyses that help them evaluate alternatives and choose the most attractive path for investment.

References

Ahmad, B., & Anees, M. (2016). Investment decisions stock buybacks or stock prices? Journal of Business Strategies, 10(2), 51-68.

Ding, Y., & Qian, X. (2014). Investment cash flow sensitivity and effect of managers’ ownership: Difference between central owned and private owned companies in China. International Journal of Economics and Financial Issues, 4(3), 449-456.

Goodman, T. H., Neamtiu, M., Shroff, N., & White, H. D. (2013). Management forecast quality and capital investment decisions. The Accounting Review, 89(1), 331-365.

Hori, K., & Osano, H. (2014). Investment timing decisions of managers under endogenous contracts. Journal of Corporate Finance, 29, 607-627.

Shroff, N., Verdi, R. S., & Yu, G. (2013). Information environment and the investment decisions of multinational corporations. The Accounting Review, 89(2), 759-790.

Trang, P. T. M., & Tho, N. H. (2017). Perceived risk, investment performance and intentions in emerging stock markets. International Journal of Economics and Financial Issues, 7(1), 269-278.

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