Investment process from the perspective of systemic approach

Lamara Qoqiauri Real member of the Academy of Economical Sciences of Georgia and New-York Academy of Science, Doctor of Economics, Professor

About the systemic approach. The systemic approach is the direction of scientific knowledge and the methodology of social practice, which is based on considering the objects in systems. It is used as an instrumentarium, which directs the research to the substantiating the wholeness of the object, discovers various contacts in it and gathers them into the total complex.
The systemic approach in its essence is the concrete principles of the dialectical materialism, in the bounds of which, we can discuss the investment process the series of those operations (the kinds of activities), which is fulfilled at the beginning capital (the preface of the process). It increases the value and conditions a definite result (the exit of the process). It is possible to learn the investing process from the position of the systemic approach, because the investment process is an economical system and it has a preface – the complex position of this system (investment surrounding) and exit – the changes of the entering investments into the economical system. The result of investing process receivedat the exit, defines the development of the economical system, in which the process is going on, and gives in it rise to the rates of the economical growth.
Managing the investing process. The investment process is realized by ruling. It is discussed to be such a strategy, which guarantees achieving of maximum effectiveness and it leads every kind of activity to the maximal growth of the economical system. Management consists of the following active cycles:
1. The analyze of the current position of the investment process, in which consists of: the analyzes of the investment attractiveness and investment business, satisfaction of the requirements for investments of the economical system;
2. Definition of the showing of volume needed by the investments and of the investment attractiveness, to which this volume is conformed;
3. Working out activities which provide needed position of the systems’ investment attractiveness;
4. The changes of the incomes in the investments of the economical system, which is provoked by the changes of investment attractiveness;
5. Changing of the parameters of economical system at the investors’ expenses, that implies the changing of the rates of economical growth.
Permanent realization of this cycle improves the management system of the investment process and increases the defectiveness of functioning of the economical system.
The realization of the systemic approach is situated in the analyzing the investment process not only in the horizontal section (the management subject – investment attractiveness – investor – investment business – the volume of the investment – investment object – ruling subject), but also in the vertical one (the world comradeship – country – region – field – enterprise – physical person). Such discussion reduces the quantity of repeated activity of the ruling of investment process and gives the complex theoretical picture of the investment process.
For preparing and realizing effective investment policy it is important to define clearly and simply the criteria of estimating the investment situation formed in the country, economical fields and regions; also working out methodological apparatus adequate to the economical regalia and its successive usage.
The investment process (that is the process of realizing investments) has every feature of the system: there always is a subject (an investor), an object (investment object), the connection between them (investment in the purpose of getting income) and surrounding, in which they exist (investment surrounding). It is characterized with a special structure and the opportunity of an exact identification between other economical process. It displays its features as a result of interaction with other systems, protects a definite conception and reflects the points of view, aims and values of the subject of the investment process. Connection is the system-forming factor, because it unites all other elements into one whole (pic. 1). the systemic approach gives an opportunity of exhaustive description of the investment process essence and defines fully its basic concept.
The investment process is defined by the formed interaction about situating investments between the investment subject and object for getting income, also the realized investing influence from the side of subject and managing organs upon the object; and changing of the conditions of investment surrounding.
Place of the investment process in the system of social relations. The investment process doesn’t exist itself and it is always involved into the sphere of following level, that is to say that it must be discussed in the bound of the total approach – discuss the system in the sphere of the interconnections with other systems. This gives us an opportunity of describing the place and role of the investment process as in the separate sphere of the activity and also in the system of the social relations. Every subject is oriented towards the development and always demands the supplementing of resource and changing this or that feature. The orientation towards the supplementing this deficit with own forces, slows the economical growth, because it demands from the subject to provide amused activities and wasting the time the its basic resources on this. In the conditions of specialization, the reducing of own forces makes the subject search for the object, the features of which give him an opportunity of filling the existed deficit with a minimal investments. The need of investments appears, when the potential of the chosen object does not satisfy the necessary criteria and needs a kind of outer participation for its development. The possibility of the investment development occurs when the resources owned by the subject and its features give the opportunity of needed influence of the object upon the demanded features of the object.
At the moment of fulfilling the investment, investor makes contacts with the concrete object. Under the investors influence the features of the investment object changes and then these changed features in the face of investment income influences upon the investor, changes its features, including – filling the resource deficit. After finishing the investment process, the subject and object begin new existence; consequently, the investment process gives rise to the diffusion of the object and subjects’ features.
The dynamic of the social development is defined by the development of separate spheres of the activity. If the revolutionary sudden changes of this or that sphere of the activity gives stimulus to the unseen before growth, this gives rise to the natural chain reaction of the development of connected to these spheres. If the evolution development of the spheres of activities takes place, its dynamics, as a rule, is defined by the least developed abilities. When the investments and investment income have different subject consistence, that is if they belong to the different spheres of activities, the various investment processes make these spheres inter penetrative. According to this, the logical ruled changing of their development dynamics take place. This provokes the natural chain reaction of the development of the interconnected spheres. Consequently, the investment processes give opportunity of making and keeping natural chain reaction of the interconnected spheres of the activities. These processes appear to be the fastening factor for the social development.
Showing the connections between the basic categories of the investment process give the opportunity of establishing dependence of the investment volume to the factors and conditions of the investment domain, that is the investment surrounding formed in the region.
The picture 2 may elucidate basic structural elements of the investment surrounding and the connections between them, which are shown in literature.
The interconnection of consisting components of the investment process. Such an approach reflects the most essential sides of the investment process, but doesn’t give us opportunity of taking in mind the influence of the current processes upon the investment surrounding and on the contrary – of the investment surrounding upon the investment process. That’s why we think important to discuss differently the interconnection of the consisting components of the investment process.
The investment attractiveness is a positive category in its context, and the investment risks participating in the process of forming this attractiveness – a negative one. That’s why it is important to turn the quantitative showings of the risks into the quantitative showings of the concept, which is essentially opposite to the concept of “the investment risk” during taking in mind the noncommercial investment risks, as a complex factor of the investment attractiveness. We must call such a concept (the antonym to the concept of the investment risk) “social-economical and economical security of the investors” or, in other words, investment security (consequently, on the macro-economical, regional, field and industrial level). The mentioned changing gives an opportunity of avoiding inter contrary influence upon the resulting showing – the investment attractiveness of two complex factors – the investment potential and noncommercial risks.
Exactly same way, every private factor of these generalized concepts have at the same positive quantitative expression (with the help of the positive showing – for defining the final level of the field’s investment security), and also negative one (with the help of conceptually “negative” showing – for defining the final level of the noncommercial investment risks of the field).
The investment attractiveness of the social-economical system (SES) is defined the position of the investment potential and the level of the investment risk. The investment assets existed in the region – the real development of the investment business in the SES – is characterized with the intensity of the investments. It its turn, it is defined by the past, current and future investment assets. The past investment asset characterizes the intensity of the investments invested before and gives an opportunity of defining their future profitability, the quantity of the presumable competitor and the most profitable sphere for the capital-investment. The current asset of the investment defines the level of the system’s economical development and gives the opportunity for predicting the volumes of the additional investments and their possible profitability, also to define the position occupied by the investor in the market in the future. Future (expected) investment asset is the oriental for planning whole investment process: from the definition of future volume of the investments till ruling the investment surrounding of the SES – for getting the needed income flow of the capital. Analyzing of these three consisting components of the investment business gives the investor information about the level of competition ability at the SES investment market, also the tendencies of its development and the activities for reducing market.
The wholeness of the investment attractiveness and investment business makes the investment surrounding for the country, region, field, corporation (existed in the manufacture). Though it is important also to reflect reverse connection, that is the influence of the investment surrounding upon the investment business. For example, the current position of the investment surrounding defines the investor’s ideas and his/her activities towards future investments. Improving investment surrounding in the current period gives the stimulus to the development of the competition held between the investors for getting the rights for investment. Also it gives the stimulus to the competition held at the commodity and service market, which helps the lowing of the prices and raising the quality of the production. Parallel to these, the inflow of the investment resources takes place, which gives an opportunity for rational and effective distribution of the existed resources to the ruling organs of the regional development. It reduces the disproportion in the regional development, improves the living social conditions in the region, helps the development of the infrastructure and communications, changes the situation in the investment surrounding according to the demands of development of the regional economy.
Taking in mind the peculiarities of the investment process, it mustn’t only be based on the usage of administrative-regulating activities, but also the usage of those economical models, which prove the necessity of this or that activity.
Subject – matter of investment process and its main stages. According to the said above, the investment process is the successiveness of the stages, motions and operations of the investment business provision. The concrete flow of this process depends on the investment object. Consequently, the division of the investment process into the stages is provoked by the kinds of the investments. We speak, of course about the real and financial investments.
The investment process consists of two main stages; they are (1) making decision about the investments and (2) Realization and exploitation of the investments. It is adopted to divide the first stage into several separate phases (under types), which characterize the real and also financial investments. The quantity of these phases may be different, but three of them are the most typical: a) underlining the goals of the investments; b) definition of the investment direction and c) selecting the concrete object of the investments.
Goals and directions of the investment. In the process of getting decision about the investments different goals are defined and reflected. The ascending goals are the formal ones, which are in the future used as the criteria of selecting investments. The formal goals come from the strategical firmness of the investment.
Working out the strategical direction of the investment business is connected with the defining equality of this or that form of the investments on the concrete stage of the perspective period and also with the definition of the direction of investment business including its branch consisting part. The priority selection of the investment forms at this or that stage by the investor is provoked by a number of inner and outer factors.
The functional direction is the most important from the inner factors, those are the basic kinds of the investor’s (manufacture, organization) activities. For example, basic direction of the investment businesses for the institutional investors is investments into the securities. The manufactures of the real sector of the economy, which perform the industrial activities, give priority, as a rule, to the investments into the material and nonmaterial assets.
The financial investment is realized mostly in the form of the manufactures’ (as concurrent, so partner ones) participation in ruling purchasing shared securities, or in the form of temporal placement of free money sources for speculative goals.
From other inner factors important role in selecting the investment direction is played by the strategical direction of the operational activity, size of the manufacture (organization), the stage of the investor’s vital cycle and others.
From the manufactures and organizations of the real sector of economy the growth of financial investments characterizes, as a rule, large-scale industries, which have more opportunity of finding the sources of placing funds into the investments, and those manufactures, which are at the stage of the so-called “ripeness”. More extended form of investments at the earlier stages is the investments in the material and nonmaterial assets.
Among those outer factors, which make an essential influence upon selecting the investment forms the most important are the rate of inflation and the percent rate formed at the financial market.
The formal goals may be the aspiration for increasing profit, widening the scales of the manufacture (activity), obtaining power and prestige in the society; also, solving the social-ecological problems, keeping and increasing the working places and so on.
These goals are not often defined distinctly, are not coordinated according to the priorities or are not verified at the subject of the ability of their realization. That’s why, it’s necessary to point out the real goal of the investments from the formal goals by establishing concrete purposed showings. For example, the formal goal – increasing profit – must be concretized in a number of showings, for which the definition of the achievement quality will be possible. Concretely, it may be the middle quantity of the profit for several years or the showing of net profit, or those other showings, which characterize the earned profit from the investment.
Formal goals of the investments make the decision of defining problems about investment directions easier. Mutual connected, independent and alternative (inter excluding) investments may also be among them.
Main stages of the investment process. According to the formation of investment portfolio, the investment process becomes importantly easier at the expense of reducing its stages. In the foreign literature dedicated to this problem, they differ following stages of the investment process:
1. Selection of the investment policy;
2. analyzes of the investment market;
3. re-inspecting the portfolio of the securities;
4. estimating the investment effectiveness.
At the first stage they define the investment goals and the volume of the necessary sources for its realization, also the quality of risk and profitability for every financial instrument. Selecting those financial assets of the potential kind, which may be included into the portfolio, fulfills this stage.
At the second stage, they concretize the rate of value of the securities’ separate kinds on the foundation of marketing conjuncture formed at the concrete moment and provide the prediction of the share rates’ dynamic of the concrete firm. Such kind of approach is called technical analyze. Basing on the got data they conduct fundamental analyzes. Its essence is analyzing the brought value of all those cash money flows, which is expected to get by the owner of the financial asset.
Third stage of the investment includes selecting concrete assets for the investors, also defining the optimal proportions between the assets in the bounds of investment capital. The bases of it are selection, selection during the operations and the diversification of risk according to total profile.
The fourth stage concerns the periodical estimation of the current portfolio according to the changing the investor’s goals and its deviation from the optimal portfolio. After this selling of the part of purchased securities and buying new ones become possible.
At the last stage they provide periodical estimation of the factual profitability and the level of risk and their comparing with the existed standards.
Main participants of the investment process and their functions. To the circle of main participants of the investments belong: state, regional and local organs of the government, manufactures and physical persons: they can participate in the process of investments from the side of demand and delivering.
In the conditions of the market economy the circle of the participants of investment process is importantly widened. The web of commercial banks, credit-commercial organizations, investment funds of companies and insuring companies have appeared, which make independently the investment decisions. But still, the state and governmental regional and local organs define their participation in the process of investments. It is represented by holding investment competitions, by selection and proving the investment projects, by licensing and quoting the production, and also by defining the quantity of the percent rate and taxation. The financial activities of the state, the organs of regional and local government as from the demanding, so the delivering side, influences essentially upon the behavior of the financial institutes and market.
Main distributor of money at the financial market is the population, because it gives much more to the investment process, then takes. Of course, it will not be said about the organs and manufactures of the executing government.
The researches of the foreign scientists U. Sharp, G. Alexander and G. Bailey show, that wholly the state and manufactures are net consumers of the money sources, that is that they use more sources then give. More concretely, many large-scale companies for realizing their long termed aims need enormous quantities of money for building factories, buying furniture, working out new products and so on. Besides, by realization active and difficult strategies of ruling cash cash masses, they appear to be main purchasers of securities. Such a situation is created on the side of the state, regional and local governmental organs, the activities of which is connected with the capital investments and guaranteeing current expenses.
The organs of executive government fill the insufficiency of the money sources by producing debt commitments and obligations, and companies by producing shares and other securities.
The factors defining the consistence of investment project participants and fulfilled functions. The consistence of the investment project participants and fulfilled functions provided by them, are defined by the following factors:
– the specifics of investment project, its volume, technological hardness and so on;
– compatibility of functions by the participants of the investment project during the realization of the project;
– financial status of the customer, who increases or reduces the influxing the financial structures in the realization of the investment project;
– providing the customer with the best material resources, building materials, techniques, furniture and so on;
– selection of the type of ruling the investment project (traditional or progressive).
Basic participants of the investment project. In the ruling the investment projects with the traditional type they differ its following basic participants: sponsors, constructor, distributor of the furniture, the consultant of insurers, legal adviser, the consultants of the taxation and financial branch, creditors and others.
Let’s discuss them in more details.
In a wide understanding, a sponsor is a guarantor; a physical or juridical person, who finances an economical project or a registration of social activities. Also, an orderer, an organizer of a large-scale project or arranger sponsor may be as commercial, so noncommercial structure.
As to the sponsor, as the participant of an investment process, we may call it an orderer, organizer, who connects then activities of every participant of a project, arranges discussions, analyses commercial suggestions of the constructors of financial structures or distributors, realizes marketing researches and selection of the financial partners. In the separate occasions, it becomes responsible for fulfilling such functions of the constructing engineering, as engineer-consulting service, projecting-construction and analytical-calculating works, preparing a technical-economical substantiation, organization and ruling of the manufacture, working out recommendations in the sphere of production realization. These reduce the quantity of the investment process participants.
Project-construction and construction organizations or individuals act the role of a constructor, that is the provider of the work. The constructor can involve other persons in the process of fulfilling the order, who become the sub-renters, and the constructor him/herself becomes the general renter. He appears to be the main fulfiller of the constructive lease agreement and is responsible the before the orderer for the fulfillment total complex of activities established in the agreement.
Distributor of the furniture represents the filial, foster companies or those other firms, which have signed at distributing furniture and providing services. If the manufacture registers an agreement with an orderer for a complex distribution of materials, building techniques and furniture to many of firms, it becomes the general distributor and answers for the whole distribution.
The insuring consultant is invited for displaying the insuring risk and estimating the quality of the project’s safety, also, for working out the appropriate recommendations. The juris-consult provides the preparations of the juridical documentation around the project, discusses wholly agreements and contracts.
The consultant of the branch of taxation questions analyzes the taxation situation existed in the country for realizing the project and also the taxation obligations of every participant, makes recommendations for minimization the taxes.
Financial consultant provides the selection of financial, credit and calculation conditions by combination of the alternative variant for the realization of the project. In the case of influxing foreign investors into the project, he must bring it to the appropriation with the existed international standards. This will make easier the status of the potential investors and creditors.
Creditors, as the participants of the investment process, lend money in different terms and conditions. Under these conditions, the creditor has a right of demanding from the debtor to return credit or fulfill other obligations. A state, bank, manufacture or a physical person, investment funds and others may be the creditors.
A traditional form of ruling the investment project, in the time of which the orderer carries out him/herself the functions of ruling, has several defects. First is that the most part of the orderers is not competent enough in every question connected with the project. It makes the level of the risk stronger during getting the ruling decision that gives rise to a number of expenses. Second one is that, the successful ruling, according to the experiences, requests the leader’s systematic participation in the investment process, because the orderer is not always able to do it. And third, this form of ruling the project is characterized by the comparative dispersion of phases and stages as in the time, so in organizing. All these gives rise to the additional problems in the provision of the s’ agreement of its every participant.
Overcoming the mentioned imperfection happens at the moment of moving to the progressive form of the investment project ruling. Its essence is that the leader (manager) of the project becomes the basic figure in the organization and ruling the investment businesses. This may be a construction or construction-projecting organizations’ especially prepared high-qualified specialist or an experienced leader. He/she provides a general ruling of the project including finances, personnel and the construction works.