Investment Strategies and Financing Approaches in Emerging Enterprises

Abstract

Investment activities are arguably the most crucial factor in the development and sustenance of an enterprise, especially in emerging markets. While there have been numerous studies on the financing structure, there is a substantial gap in the literature regarding the impact of capital structure and cost of capital on investment efficiency in transitional economies. This research seeks to address this gap, using a mixed-method approach that combines qualitative case studies and quantitative financial analysis. The research involved conducting case studies with five enterprises from the technology, manufacturing, and services sectors. In addition, the researcher used secondary data obtained from the websites of the Bucharest Stock Exchange and the Romanian National Registry of Financial Statements. The data was used to calculate the Return on Investment, debt-to-equity ratio, and cost of capital. The analysis shows that businesses that adopt the optimal capital structure perform better, relative to their counterparts, in the aspect of profitability and market value. They also have a lower cost of capital, as well as greater financial sustainability. On the other hand, businesses with higher leverage perform poorly, with their failing market position forcing them to adopt measures such as providing discounts to customers and investing in motor vehicles to reduce operational costs. This research shows that even in the current state, some of the basic principles that have traditionally applied still have bearing. However, there are some underlying problems, some of which have been highlighted in Nenite-Petrescu et al.’s case study of three Romanian companies. Some of the factors which have been identified as contributing to the negative performance of the three companies include poor return on assets, return on capital employed, and return on investment; low levels of liquidity; low sales and profits; and high cost of Sales, as well as low purchase and employment of personnel. All these factors represent significant inefficiencies in the aspect of capital unproductivity for the businesses. Some of the lessons learnt from the analysis include the non-recognition of business risks and their mitigation. A business should consider the various events and circumstances that may impact negatively on their ability to meet obligations toward obligations taken by such businesses. In conclusion, enterprises need to manage their financing strategies to ensure that they minimize their risk, while maximizing their long-term growth potential. This research will prove important for future researchers and business enterprises in transitional economies.