Methods of financing of investment activity

The types of investments in modern economy.
Теги: топики
Автор: Ирина Нестерова ✔ 03.03.2018

Нестерова И.А. Methods of financing of investment activity // Энциклопедия Нестеровых

There is quite a bit to learn about each different investment type. The stock market can be a big scary place for those who know little or nothing about investing. Fortunately, the amount of information that you need to learn has a direct relation to the type of investor that you are. There are also three types of investors: conservative, moderate, and aggressive.

Investments, their Economic Essence and Types

Methods of financing of investment activity

The term "investment" occurs from a latin word "investire" – to dress. Within the limits of the centralized planned economy it was not used, and speech always went about capital investments, i.e. about the expenses directed on reproduction of a fixed capital, their increase and perfection. Investments were meant as long-term capital investments in various branches of economy, otherwise, investments were identified with capital investments. With the realisation beginning in our country of market transformations the point of view on the maintenance of a category of "investment" has changed, that has found the reflexion in the legislation.

Investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. Investing is the active redirection of resources: from being consumed today, to creating benefits in the future; the use of assets to earn income or profit. An investment is a choice by an individual or an organization such as a pension fund, after at least some careful analysis or thought, to place or lend money in a vehicle that has sufficiently low risk and provides the possibility of generating returns over a period of time Placing or lending money in a vehicle that risks the loss of the principal sum or that has not been thoroughly analyzed is by definition speculation and not investment at all [1].

In the case of investment, rather than store the good produced or its money equivalent, the investor chooses to use that good either to create a durable consumer or producer good, or to lend the original saved good to another in exchange for either interest or a share of the profits. In the first case, the individual creates durable consumer goods, hoping the services from the good will make his life better. In the second, the individual becomes an entrepreneur using the resource to produce goods and services for others in the hope of a profitable sale. The third case describes a lender, and the fourth describes an investor in a share of the business. In each case, the consumer obtains a durable asset or investment, and accounts for that asset by recording an equivalent liability. As time passes, and both prices and interest rates change, the value of the asset and liability also change [1].

The means intended for investment, in the overwhelming weight act in the form of money resources. Besides, investments can be carried out in naturally-material and mixed forms.

The economic nature of investments consists of the relations arising between participants of investment process concerning formation and use of investment resources with a view of expansion and perfection of manufacture. Therefore investments as an economic category carry out a number of the important functions without which economy development is impossible. They predetermine economy growth, raise its industrial potential.

At investment macro level creations of a necessary raw-material base of the industry, development of social sphere, the decision of problems of defensibility of the country and its safety, problems of unemployment, preservation of the environment etc. are a basis for realisation of a policy of the expanded reproduction, acceleration of scientific and technical progress, improvement of quality and maintenance of competitiveness of a domestic production, structural reorganization of economy and balanced development of all its branches,

Exclusively important role is played by investments micro level. They are necessary for maintenance of normal functioning of the enterprise, a stable financial condition and maximization of profit of the managing subject. Without investments maintenance of competitiveness of the let out goods and rendered services, overcoming of consequences of moral and physical deterioration of a fixed capital, acquisition of securities and an investment of means in actives of other enterprises, realisation of nature protection actions etc. are impossible.

For realization of investment activity both on macro – and at micro levels it is necessary to represent in details existing kinds and types of investments. All investments can be classified to various signs.

Depending on objects of capital investments allocate real and financial investments. As real investments understand capital investments in creation of the actives connected with realisation of operational activity and the decision of social and economic problems of the managing subject. The Enterprise-investor, carrying out real investments, increases the industrial potential – the basic production assets and circulating assets necessary for their functioning [2].

Financial investments are capital investments in various financial tools, first of all in securities, and also in actives of other enterprises.

At their realisation the investor increases the financial capital, receiving dividends and other incomes. Financial investments have or speculative character, or are focused on long-term investments. Speculative financial investments have for an object reception by the investor of the income in the concrete period of time. Long-term financial investments basically pursue strategic targets of the investor and are connected with participation in operation of business in which the capital is invested [3].

Under the property right of the investment got by the investor are subdivided on direct and indirect. Direct investments are a form of an investment which gives to the investor the direct property right to securities or property. Indirect investments represent investments in a set of securities or a property. In this case the investor will own not the requirement to actives of this or that company, and a share in a portfolio.

On the investment period distinguish long-term, intermediate term and short-term investments. Long-term investments are capital investments for the period from three and more years, intermediate term investments – investments from one till three years, short-term investments – investments for the period till one year.

The Characteristic of Sources and Forms of Financing of Investments

Sources, forms and methods of financing of investments into a fixed capital are defined by character of its participation in process of production of goods and features of investment activity.

Experience of the developed countries shows, that for maintenance of stable rates of growth and maintenance of a favorable investment climate approximately the fourth part of all investment investments, is carried out at the expense of the state assignments. Taking into account indirect stimulation of capital investments the state share in their financing can reach 30 %.

The amortization policy in the European countries is actively used and for stimulation of structural shifts and activization of innovative activity. So, in new east earths of Germany depreciation charges of the enterprises have been released from the profit tax and the tax to corporations which were charged under the raised rates and for a certain circle of the goods could reach 50 %.

In Japan realising strategy of technological leadership, for the purpose of creation of conditions necessary for it use special amortization, tax and financially-credit stimulus for expansion of innovative activity, and also the developed system of brave financing of the enterprises.

The amortization policy of the state usually co-ordinates with a tax policy, and influence measures on economy in these areas will mutually be coordinated. At increase of rates of the taxation of profit of the enterprises methods of the accelerated amortization are encouraged also.

For example: according to the reform of "Law on Tax" 1986г in the USA possibility of write-off of cost of principal views of cars and the equipment, established after 1986г is provided., privileges also are entered into five years' term under the investment credit. According to the law 1981in the USA 6 % are subtracted from the profit tax sum from volume of new investments into cars and the equipment with service life 3 years, 10 % – with service life 5 – 10 years, and also 25 % of expenses for research and development under condition of excess of their volume in comparison with average value for last three years [4].

In the USA, as well as in other countries with the developed market economy the profit tax of the enterprises is performs the function:

  • a source of means for formation of a profitable part of the federal budget
  • one of powerful, but at the same time flexible levers of the state economic influence.

Last decades this tax in the USA as a whole decreases: if in 50-60 years it exceeded 20 % in a total sum of tax revenues, in the eighties its share made 17 %, in 90 it has decreased to 8,6 % and less [3].

Element of influence of the state on market economy by means of a tax policy which allows to reduce the sizes of the profit tax, is "investment tax the credit", providing decrease in taxable­ profit for the sum of percent of the capital investments used on acquisition of new cars and the equipment. Influence of this tool on economy not unequivocally, along with positive influence it has also negative motives: lays down the enterprises of various branches in unequal conditions, conducts to a wide variation of the actual rate of taxes to profits.

The enterprise using only own capital for realisation of innovative activity, has the highest financial stability, but limits rates of the development since cannot provide formation of necessary additional volume of actives during the periods of favorable market condition and does not use financial possibilities of a gain of profit on the invested capital.

Let's consider components of own capital.

Authorized capital stock is the starting capital necessary for the enterprise for realisation of financial and economic activity for the purpose of reception of profit. Contributions in уставный the capital are subdivided into contributions by money resources and contributions the property transferred by the participant on account of repayment of the obligations under the contribution.

Authorized capital stock is a property basis of activity of the organisation, it defines a share of each participant in operation of business and guarantees interests of its creditors.

Authorized capital stock distinguishes that it should be distributed between its participants from other structural parts of own capital of the enterprise. Therefore the decision of general meeting of founders on its changes should be accompanied by instructions on an order of their distribution between participants.

The additional capital stock is an emissive profit created in joint-stock companies and representing the sum of excess of a sale price of actions over nominal during carrying out of an open subscription. The issue income which has arisen at formation of the authorised capital of joint-stock companies, is considered only as the additional capital and it is not supposed to direct it for needs of consumption [5].

In other words, the additional capital is a source of means of the enterprise, created as a result of revaluation of property or sale of shares above a face-value.

The following component of own capital, is the reserve capital representing the insurance capital of the enterprise, intended coverings of the general balance losses in the absence of other possibilities of their compensation, and also for payment of incomes to investors and creditors in case on these purposes there is no profit.

Rather original and perspective component of own capital of the enterprise are special (target) financial funds. Purposefully generated funds of own financial assets concern them for the purpose of their subsequent target expenditure. It is possible to direct such funds on the planned and predicted expenditure, including on financing of innovative activity.

The order of formation and use of means of these funds is regulated by the charter both other constituent and internal documents of the enterprise.

Accumulation and consumption funds concern special purpose funds. The accumulation fund is understood as the means directed on industrial development of the organization or other similar purposes, provided by constituent documents (for example, on creation of new property). Consumption funds include the means, directed (reserved) on realisation of actions for social development (except capital investments) and to material encouragement of collective of the organization and other similar actions and the works which are not leading to formation of new property of the organization [6].

The following component of own capital of the enterprise is the unallotted profit. It characterizes a part of profit of the enterprise, received in the previous period and not used on consumption by proprietors and the personnel.

The unallotted profit is estimated as a difference between revealed on the basis of accounting of all operations of the organization and an estimation of articles of accounting balance financial result for the accounting period and the sum of taxes due to payment and other similar obligatory payments paid according to the legislation of the Russian Federation, at the expense of profit after the taxation, including sanctions for infringements.

Owners can annually withdraw from the enterprise actives in the sum equal earned it for year of net profit. However, if proprietors of the enterprise consider more favorable to refuse from the current income in advantage even more substantial growth of own capital of the enterprise in the future they can leave the sum of net profit due to them to the enterprise. In this case speak about reinvestment profits. The riches of proprietors will increase not at the expense of reception of current incomes by them, in summary increases in their share in the enterprise capital. In turn, the enterprise has an opportunity expansion of scales of the activity at the expense of an investment of a part of unallotted profit in innovative projects, and, hence, still большего increases in weight earned by it have arrived in long-term prospect.

It is necessary to notice also, that the size of own capital is criterion of an estimation of investment appeal of the enterprise. I.e. presence of own capital directly influences possibility of use of extra means which are given by results of an estimation of last and current activity of the enterprise.

The requirement of the enterprises in internal funds can be changed during the long-term period, therefore is inexpedient to finance completely innovative projects with a long time of recovery of outlay at the expense of own sources. Therefore the enterprises are used frequently for financing of innovative activity by the extra capital.

The loan capital is used by the enterprise, characterizes in aggregate volume of its financial obligations.

The loan capital is the part of the capital used by the managing subject which does not belong to it, but is involved on the basis of the bank, commercial credit or an issue loan on the basis of a reflexivity. Loan proceeds can be short – and long-term.

Long-term financial obligations contains all forms of the loan capital at the enterprise concern them with term of its use more than one year. The basic forms of these obligations are long-term credits of banks and long-term loan proceeds which term of repayment has not come yet or not extinguished in the provided term.

All forms of the involved extra capital concern short-term financial obligations with term of its use till one year. The basic forms of these obligations are short-term credits of banks and short-term extra means (as provided to repayment in the forthcoming period, and not extinguished when due hereunder), various forms of creditor debts of the enterprise (on the goods, works and services; under the given out bills, on the received advance payments, by calculations with the budget and off-budget funds; on a payment; with branches; with other creditors) and other short-term financial obligations.

In the conditions of market economy any enterprise cannot and should not do without borrowed funds as their use promotes increase of efficiency of own means, to satisfaction of certain requirements of the enterprise. Borrowed funds are the financial lever with which help profitability of the enterprise raises. The variety of these means gives the chance their uses in various situations, basically in following cases:

  • for the purpose of increase of profitability of own means;
  • at insufficiency of own means;
  • at formation of a variable part of turnaround actives;
  • at a covering of the separate expenses having non-uniform character during the separate periods of time;.
  • as a source of investments [6].

Borrowed funds as a source of circulating assets as it was already marked, can carry out a different role. They can be:

  • an additional source at a lack of own means;
  • a source of a covering of a changeable part of turnaround actives;
  • the financial lever raising profitability of own means.

Use of extra means at a time lack own is quite natural for the enterprise.

There are some basic forms of financing of investment processes.

At First, this is a government financing from budgetary funds of different levels, and also special state funds are for this purpose used. All it allows to finance effectively those directions of scientific workings out which have priority value for development of innovative activity as a whole. Special target programs are for this purpose organized and on a competitive basis various innovative projects are selected.

Secondly, this joint-stock financing which is accessible to joint-stock companies, and is expressed in the form of a share issue and their placing among investors for financing of the investment projects which are carried out by the company.

Thirdly, bank lending. But this kind of financing is carried out for investment projects with the term of the realisation exceeding a time of recovery of outlay of the given project. Also presence of possibilities and sources of return of the enclosed means and increase in the invested capital is necessary.

Fourthly, there is a form of venture financing which is carried out on interest-free granting of financial resources and without guarantees of their return.

It is one of forms of the brave capital. Thus the investors who are carrying out venture financing are preliminary ready to loss of the enclosed capital, give means for long terms and cannot withdraw it before the termination of term of granting. Certainly, risks of venture investors are very great, but in case of successful realisation of the project risks are repeatedly compensated by received superprofit. According to it venture investment is conducted only at careful selection of potential projects on a competitive basis, and means are allocated to the most perspective innovators.

The fifth way of financing of innovative activity is financial leasing which represents the long-term credit and it is given in the natural form. Repayment of such credit occurs by installments. Such way of investment is used, basically, for acquisition of the expensive equipment of the innovative project necessary for carrying out [7].

Secondly, this joint-stock financing which is accessible to joint-stock companies, and is expressed in the form of a share issue and their placing among investors for financing of the investment projects which are carried out by the company.

One more way of financing is forfaiting which represents transformation of the commercial credit into the bank. Operation occurs as follows: the buyer makes out the complete set of bills for the sum of the transaction plus percent for granting of the commercial credit and transfers to its seller, and the seller considers these bills in bank, thus releasing itself from property responsibility in case of an inconsistency of the buyer, then under the considered bills the seller receives money in bank. Thus, the credit risk takes up bank, i.e. it grants the loan.

At last, last variant of financing assumes reception of necessary financial resources for realisation of investment projects from various accessible sources. The given way is called as the mixed financing and under all other equal conditions is the most preferable to all participants of the innovative project, including investors as reduces their risks.


There are two types of sources of financing: own and extra. Among financing forms allocate state, joint-stock, credit, venture, leasing, forfeiting and the mixed financing. All forms possess certain features, advantages and lacks.

Realisation of necessary changes at the enterprises and in the organisations concerning let out production and services, the "know-how", organizational structure etc. probably only in the presence of financing of the given changes.

Reception of a different sort of market, technological and organizational advantages – a main objective of innovative activity. Therefore there is no sense to finance the investment project which will not provide return of the enclosed means and certain profit. Therefore efficiency and value of the innovative project are defined taking into account the future possibilities which it will bring. And if available resources cannot be used effectively project financing is inexpedient.

In the conditions of a variety of forms of financing of innovative activity one of the important questions is the choice of that form of financing which will be most effective of all accessible.

During work performance the basic existing forms of financing of innovative activity have been defined and their characteristic is given.


  1. Уильям Ф. Шарп, Гордон Дж. Александер, Джеффри В. Бейли Инвестиции Издательство: Инфра-М, 2007 г.
  2. Деева А.А. Инвестиции. – М.: Экзамен, 2006
  3. Духаев А. Иностранные инвестиции в Российскую экономику // Риск. -2006. – №1. C 45
  4. Frank K. Reilly Investments (with Thomson ONE – Business School Edition) – 2005
  5. Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan Fundamentals of Corporate Finance Издательство: McGraw-Hill Irwin, 2005 г.
  6. Тычинский А.В. Управление инновационной деятельностью компании. – Таганрог: ТРТУ, 2006.
  7. Горемыкин В.А. Лизинг: учебник для вузов. – СПб.: Питер, 2005.
  8. Инвестиции: учебник. / под ред. Ковалева В.В., Иванова В.В. –М.: Проспект, 2004
  9. Некрасова И. В., В. А. Алешин, А. И. Зотова Инвестиции- Ростов на Дону Феникс, 2009 г.

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