1.1. The essence of investments
The term “investment” from Latin “invest” means input capital in order to receive definite benefit. According to the Law of RK “about investments” investments are “ all kinds of property (except goods for personal consumption), including subjects of financial , also rights for it, which is inputted by investor into charter capital of juridical entity or increasing of fixed assets that used for entrepreneurial activity.
In Kazakhstan’s economy the term “investment” has become to use with crossing to market relations. In conditions of centralized directive economy only one concept used – “capital inputs”. However, the practice shows that conception “investment” has much wider meaning, because it expresses all kinds of financial, property and intellectual values, which input in the entrepreneurial sphere for getting definite economic profit.
Capital inputs are just part of investment and directed to basic capital.
There are different approaches for “investment” conception.
“Investments represent itself all kinds of assets that are inputted in economic activity for getting income”.
“Investment activity is a refusal from using incomes for current consumption, but to form capital and expected expansion of consumption in the future”.
“In the macroeconomic level, investments are aggregation of all inputs in property and stocks in country’s economy”.
“Investments are acquisition of assets, for example securities, art, deposits in banks for receiving financial profit or increasing of capital”.
From these definitions we see that the main aim of investments is profit. That’s why investment is senseless, if it doesn’t give such result.
Consequently, economic content of investments in conditions of market economy consist in combination of two sides of investment activity: expenses of resources and receiving results.
Functions and role of investments in the state’s economy
There are main functions of investments:
1) Promotion of development of production or forming internal supply of goods and services ;
2) Indemnity of threadbare main funds and using raw materials for renewal of production process;
3) Development of human potential, new technologies and materials;
4) Creating the basis for future economic growth.
On the macroeconomic level investments are basis for developing national economy and increasing effectiveness of production by:
1) Renovation and reconstruction main manufacturing funds of enterprises and non-production spheres;
2) Acceleration of scientific-technological progress, improvement of quality and providing with competitiveness of native produce;
3) Creation of necessary base of raw materials;
4) Reduction of costs of production
5) Increasing and improving structure of export;
6) Solving social problems, including problems of unemployment.
On the microeconomic level, investments need for achieving following goals:
1) Renovation of basic production funds that under influence of competition and scientific-technological progress;
2) Introduction new forms and methods of labor’s organization;’
3) Fulfilling environmental-protective activities;
4) Preparation of qualified specialists;
5) Acquisition of securities and input means to assets of other enterprises;
6) Acquisition of controlling shareholding.
Consequently, investments as economic category play important role in the economy’s development. Due to investments aggregate demand, labor force and common income are increase.
1.2. Types of investments
Along with that in economic theory there are different approaches to definition “investment”; also we have different classifications of investments.
There are:
1) By direction of investments;
2) By forms of investments;
3) By possibilities to manage the objects of investments;
4) By terms of investment activity;
5) By degree of risks.
Depending on direction of investments, there are 4 types of investments:
- Real investments;
- Financial investments;
- Investments to nonmaterial assets;
- Intellectual investments.
Real investments are investments to basic capital, means for supplement turnover means. It is capital inputs that directed to construction of new, reconstruction and expansion of manufactures. It has capital basis, that’s why production capital increases.
Financial investments are investments of moneys to securities, deposits, other financial instruments, but also granting loans, credits. It has financial basis, that’s why money capital increases.
The volume of financial investments depends on degree of well-development of national financial market and its institutes. Financial investment activity contributes to growth of real investments significantly. That’s why we can say that both of them are supplementary, but not competitors.
Investments for nonmaterial assets include acquisition of rights to use property rights (for example, rights to use land plot), acquisition of patent, license.
Intellectual investments are investments to human resources (to social sphere, education of skilled workers, increase of qualification of specialists), also means to scientific-investigative works.
Thus, in modern economy investments can be:
- Moneys, banking deposits, shares, obligations , pays, and other financial instruments;
- Movable and immovable property (buildings, constructions, transport, equipment, land plots, and etc).
- License, patents, inventions, programming goods, good sign, property rights, objects of copyright and other intellectual values.
By forms of investments there are following types of investments:
1) State investments, that executed by state officials, state enterprises and other enterprises with state participation;
2) Foreign investments, that realized by foreign countries, international organizations, foreign juridical and physical entities;
3) Private investments implemented by individuals and non-state enterprises.
By possibilities to manage objects of investments, they are divided to:
1) Direct investments;
2) Portfolio investments;
3) Indirect investments.
Direct investments refer to real investments. It gives the rights to participate in managing of object of entrepreneurship. As a rule, direct investor by investing his means in construction of new or active object, then he is becoming owner or constituent of business. In Kazakhstan, direct investments represent all kinds of inputs to main capital, that implemented by foreign and native investors, excepting investments that connected with state warranties of RK.
Indirect investments are portfolio and other investments that have money basis.
The end aim of indirect investors is receiving money profit. That’s why they don’t give the rights to manage object of investments. As against to direct investments, portfolio investments are used in securities (simple and preference shares, corporative obligations and others). To other investments we refer granting credits, but they don’t give right to participate in managing objects of entrepreneurship.
Depending on terms of investments, there are:
1) Short-term investments;
2) Average-term investments;
3) Long-term investments.
Short-term investments are investments for no more than 1 year (for example, short-term deposit investments purchasing short-term saving certificates, preference shares, and etc).
Average-term investments are investments from1 year to 5 years (for example, average-term deposits, purchasing securities, and etc).
Long-term investments are investments for more than 5 years.
By degree of risks there are:
1) Investments with low level of risks;
2) Investments with average level of risks;
3) High-level risks.
Investments in high-tech sphere and new scientific elaboration that get involved with high- level risks are called venture investments.
Small projects are simple and limited by volume. For example, in USA investments for small projects amount to 10-15 million dollars, labor force and time are 40-50 thousand people and hours.
Megaprojects are target projects. Such projects can be international, state (for example, creation of new capital-Astana), regional, branch and mixed. Costs of such megaprojects are expensive (more than 1milliard dollars).As a rule, these projects is long-term and consist of small projects.
By degree of participation in reproductive process it is distinguished following kinds of real investments:
- Reinvestments, which are directed to repair of old part of production capital;
- Nett investments, which intended for reconstruction, modernization and expansion of production process;
- Brutto investments are aggregation of reinvestments and nett investments.
1.3. Investment policy in RK
At the present stage of development of Kazakhstan as a new independent state, orienting to the market economy, the main direction of economic reforms is to develop and implement investment policy aimed at ensuring high economic growth and raising economic efficiency.
To solve these problems, as well as to ensure the structural transformation of the economy through a program of the government's actions to deepen reforms in the context of limited domestic sources of financing essential attraction of foreign capital in the economy.
Investment policy is one of the main elements of economic policy, system of measures that determined the volume, structure and direction of capital investments, growth of main funds and its innovation by new technologies. It stimulates and regulates investment process, forms conditions for stable social-economic development of state, region, branch and business at a whole.
Investment policy is based on legislature. In the annual Epistyles of President of RK, decrees of President of RK and in investment laws it is determined directions of investment activity.
Investment policy of state includes:
- Regional investment policy;
- Branch investment policy;
- Investment policy of economic subjects.
Regional investment policy is aggregation of measures that regulates by state for providing with investment attraction of region for foreign and native investors. Such factors as natural resources, economic potential and climate conditions influence on investment activity.
Branch investment policy is realized for:
1) Choice and support priority branches;
2) For accelerating science-technological progress and introduction new technologies and forms of organization of work in production.
Investment policy of economic subjects is connected with searching resources of investments and its effective investment in constructions of new and repairing of old manufacturing.
The goal of state investment policy of Kazakhstan is realizing support of important branches for providing with economic growth and increasing productivity of work.
During the transition of the Republic of Kazakhstan to market economy was created in parallel and regulatory - legal framework for investment.
February 28, 1997 № 75 - 1 SAM came the Law "On State Support of Direct Investment", which regulate the relations arising in support of direct investments in Kazakhstan, and by a single state agency authorized to carry out state support and represent the Republic of Kazakhstan - " Agency for Investments, whose chairman is appointed and removed from office only by the Government of Kazakhstan.
Also April 5, 1997 № 3444 Presidential Decree "On approval of list of priority sectors for attracting direct domestic and foreign investment" was defined list of highest priority and most important industries for investment. In particular, industries such as:
1. Production infrastructure.
2. Manufacturing industry.
3. Facilities in Astana.
4. Housing, social facilities and tourism.
5. Agriculture.
Presidential Decree of March 6, 2000 № 349 approved rules for the granting of privileges and preferences in investment activity.
To improve the investment activity is also influenced by the level of small and medium-sized businesses in the country, as the economy of any state cannot function and develop without an optimal combination of large, medium and small businesses, and small business plays an increasingly important role in the economy of the country. It was therefore agreed a number of resolutions aimed at the development, improvement and protection of small and medium business (to support small businesses).
But the effective use of investment resources is impossible without the securities market and in particular - Stock Exchange. And here, in order to implement the development strategy of Kazakhstan till 2030, January 28, 1998, № 3834 was adopted by Presidential Decree, which adopted the Programme of Action and including in the field of investment policy, goals and priorities. The Decree of the issues to ensure a favorable investment climate in the Republic in terms of market economy (along with economic and social issues), and also covered issues related to ensuring the effective protection of foreign investments. In the section "Favorable investment climate" a decision on the accelerated development of the stock market, protect and support small businesses, etc.
The last changes on Investment Law were on January 8th, 2003.
Thus, both politically and legally in the Republic of Kazakhstan has created a very favorable investment climate.
2.1. Kazakhstan. Current conditions of investment funds
Securities market in Kazakhstan are more than ten years, during this relatively short period, he passed all stages of evolutionary development, from formation to formation.
Currently, the stock market is modernized, taking into account international practice and the specific features of the economy.
One of the innovations in stock market development is the emergence of investment funds in connection with the adoption in July 2004 of the Law "On Investment Funds". It should be noted that such a law is adopted in 1997, but it is significantly outdated and no longer corresponded to modern tendencies of development of the stock market. With time of introduction of the first law in Kazakhstan was established just one investment fund (JSC "Mutual fund - Bank of Kazakhstan Halyk, Capital), which will exist one and a half years and could not attract investors and develop its activities for several reasons. Firstly, because of imperfection of the legislation on investment funds, mostly because of the definition of only one and not the most efficient in terms of cost models for organizing activity of fund. Secondly, due to a problem of double taxation scheme- investment income derived from investment funds. And, because of mistrust and low awareness of investors about the funds.
The new version of this law, already considering defect, the right ¬ applied practice, and international experience, should solve the problem of collective forms of invest and to attract domestic investors to the stock market.
Creation of investment funds with professional managers at the moment is particularly important in the continued growth of domestic savings, the need for their effective involvement in the real economy. In addition, the condition that growth and falling dollar to the national currency, a substantial uncertainty of the dollar against the euro, reducing interest rates on deposits in banks, the emergence of investment funds as an alternative financial instrument in the stock market was very timely and serve as an additional incentive for securities market development in general.
To be able to judge the potential of the new law, it is given in explanation of general information about it. The law stipulates two types of investment funds: shared and unit, the latter being introduced for the first time.
Unit Investment Fund - Combined investors' funds transferred to trust Management Company. Mutual fund itself is not a legal entity - the so-called "property complex", and in fact, an investment portfolio.
By investing money in mutual funds, the investor actually concludes with a management company agreement for trust management and becomes a holder of shares. Unites are issued by Management Company and act as trustee for these mutual funds.
Such funds may be created in three forms: open, closed and interval. In an open-end fund investor has the opportunity to buy or sell his units in the prescribed manner, but at least once every two weeks. In the interval fund investor has the opportunity to buy or sell a stock only during certain periods, but at least once a year. Closed-end fund offers its unit’s holder the right to participate in the general meeting of holders of units of the fund, as well as to receive dividends on units.
In addition, a separate type of investment funds is risk investment (or venture capital funds).Venture investment funds can only be joint -stock or closed unit investment funds.
Unit is the nominal issued security. Unit certifies the right of the owner to share the property that constitutes mutual fund, as well as to receive the money from the sale of mutual fund assets at the termination of its existence. Unit is uncertificated securities - registration of rights to shares by the registrar on personal accounts in the register of unit holders.
Shareholder income consists of gains of its shares. Value of shares over time may both increase and decrease, because the changing market value of securities in the Fund's assets. That is why the holders of shares shall bear the risk of losses associated with the change in value of shares. Fund performance is guaranteed neither the state nor the management company. Management Company and shall not provide any guarantees, promises and assumptions about future efficiency and profitability of its investment activities.