Investment Policy and Legal Framework for Investments

<p style="text-align: right;">doi.org/10.52340/eab.2025.17.01.08 <p style="text-align: justify;"><br />The formation and development of market mechanism for investment at the beginning of the 21st century, and implementation of investment policy, have been inconsistent and contradictory nature. Taking a country out of the deep economic crisis, achievement of macroeconomic stabilization, and sustainable economic growth, is impossible without improvement and development of investment potential. This, in its turn requires development and implementation of effective investment policy and strategy. As well as the enhancement of legal and legislative regulations in the investment domain in general.<br /> The main purpose of this work is to present a clear picture of the contradictive nature of investment activities in the country. Specifically, while the state cannot make significant investments into the economy, and, on the other hand, the existing market mechanisms for investments are non-operational, hindering the activation of the investment market.<br /> The article highlights the extremely ineffective nature of the current investment policy, particularly concerning foreign investments; it is crucial for foreign investors to have certain guaranties and legal protection from the host the country.<br /> The work briefly examines the deficiencies in the Law of Georgia on Promotion and Guarantees of Investment Activity and the Law of Georgia on State Support of Investments. These deficiencies have led to the absence of an effective regulatory mechanism in this domain. Consequently, there have been ongoing discussions about the review of investment activities, the regulation mechanisms concerning foreign investors, and the methods of engaging with them. <br /> The work identifies the role and importance of investment policy in the economic development of the country. Effective utilization of the investment potential existing in the national economy and its relevant resources greatly influences achieving sustainable economic growth, improving investments, and enhancing investment effectiveness.<br />Special attention is paid to the development and implementation of sound investment policies, specifically addressing the problems of state involvement, regulation and support in the investment process. The regulation of investment issues should ensure compliance within the investment domain and its complex elements, optimizing the development of various economic sectors of the country and the relations of economic entities.<br /> To address these problems, the work outlines the real prerequisites for applying principles of indicative regulation in investment activities, along with the main instruments for their implementation. <br /> Several models of the investment process are presented, each characterized by specific objectives and tasks aimed at supporting development forecasting, effective capital investment, and achieving certain sociol-economic and political goals faced by the state.<br /> And finally, the work offers several modest opinions on solving the challenges in the investment domain. For effective regulation of direct, financial and intellectual investments, the state should undertake the following tasks: <br />• Creating a favourable and attractive investment environment for implementation of industrial activities in general (this task can be achieved through the introduction of appropriate legislation, adherence to prescribed norms, and the establishment of a fair and predetermined system of solution itself); <br />• Ensuring competition in industrial activities and creating fair, legislative conditions for other entrepreneurs. <p style="text-align: justify;"><strong>Keywords:</strong> Iinvestment, investment activity, investment legislation, foreign investment, legislation, indicative regulation, investment process.<br /><strong>JEL Codes:</strong> E22, E65, F21, G24 <p style="text-align: justify;"><strong>Introduction</strong> <p style="text-align: justify;">The investment domain serves as the cornerstone for the reproduction and development of economic systems. The field of investments encompasses the area of economic relations where strategies of industrial entities implementing innovations are executed. These strategies primarily take the form of investments, which are transformed during the investment process, thereby turning concepts into reality.<br /> As capitalist relations evolve, investment activity develops alongside the accumulation of financial capital, integrating into financial activities within the capital market. Concurrently, the diversification of legal forms in financial services takes place.<br /> It’s important to note that various forms of capital investment are not disappearing. On the contrary, both old and new forms and methods are developing in parallel, occasionally intersecting. For example, the acquisition of enterprise shares – originally a form of portfolio investment - often serves as a means of direct investments through the redemption of majority ownership of shares, facilitated by merger and acquisition of the enterprises.<br /> Achieving the strategic goals of a national economy requires the activation of investment activities, necessitating active participation from the government. The level of state involvement largely depends on the maturity of market mechanisms and existing investment legislation. <br /> Our analysis indicates that the development of legislative frameworks governing investments involves diversification. This allows investors to determine the most effective investment method, considering the potential loss of invested capital due to industrial risks and the anticipated returns in case of successful enterprise activities. Investors face the dilemma of whether to participate in the production process personally with capital or solely through capital investment. Direct involvement of the entrepreneur in industrial activities provides maximum control over industrial risks: the investor (personally or through an authorized person) makes decisions regarding enterprise development, consequently earning income or incurring losses based on the correctness of these decisions and the validity of forecast.<br /> Despite numerous publications on investment activities, theoretical aspects of the investment process, and the study of direct and portfolio investments (Fabbozzi F. 1995; Marcus A., Kanea A., 2008; Qoqiauri L. 2013; Sharp F., 1995; Blank I. 2006,) significant attention has not been given to planning and state regulation of investments. There is a need for further study on the legal regulation of direct and portfolio investments, the specification of state tasks in investment regulation, the interrelated investment planning, the peculiarities of state regulation of real and financial investments, and the formulation of the investment process, its main stages, and determining factors; additionally, it is essential to focus on the determination of the essence and periods of investment planning etc. <br />Hence, the necessity of addressing the aforementioned problems entails the need to achieve the following objectives:<br />• State and legal regulation of direct and portfolio investments;<br />• Provision of the fundamental objectives of the government in the investment process; establishment of criteria for the interrelated planning of real and financial investments;<br />• Justification of the necessity of considering investment risk factors during the implementation of investment projects; conduction of a through review of the main types of investment risks, taking into account the specific investment climate of Georgia. <p style="text-align: justify;"> <strong>Investment Domain - the Foundation for Reproduction and Development of Economic System</strong> <p style="text-align: justify;">The field of investments encompasses the area of economic relations where strategies of industrial entities carrying innovations are implemented. These strategies primarily take the form of investments, which are transformed during the investment process, turning ideas into reality. <br /> As capitalist relations evolve, investment activity develops alongside the accumulation of financial capital, integrating into financial activities within the capital market. Concurrently, diversification of legal forms in financial services takes place.<br /> It is important to note that various forms of capital investment are not disappearing. On the contrary, both old and new forms and methods are developing in parallel, sometimes crossing or intersecting. For example, the acquisition of enterprise shares - originally developed as a form of portfolio investments - often serves as a means of direct investment through the redemption of majority ownership of shares, facilitated by mergers and acquisitions of the enterprises.<br /> In view of the above, we can identify the economic essence of the concept “investment” and highlight the common characteristics of the development of legal forms influenced by capital investment. Our analysis indicates that the development of legislative frameworks governing investments is characterized by diversification. This diversification allows investors to determine the most effective method or procedure for investment, by taking into account the probability of possible capital loss due to industrial risks and the expected return in case of successful enterprise activities. In each case, investors face the dilemma of how to participate in the production process – whether through personal involvement with capital or through capital investment alone. Direct participation of the entrepreneur in industrial activities provides maximum degree of control over industrial risks. The investor (personally or through authorized person) makes decisions or influences decision-making regarding the development of the enterprise (business). Consequently, they earn income or incur losses based on the correctness of these decisions and the validity of developed forecasts.<br />Often, the entrepreneur does not intend to participate in the industrial activities and is limited to providing free capital. An investor, participating in the production process by supplying capital, is generally not concerned with the success or failure of the production itself. Such an investor is primarily interested in the income earned from the invested capital, either in the form of the dividends paid as a shareholder or from the capital gains realized from the difference between the initial purchase price of shares and their resale value (Kominka A.L., 1997, pp. 49).<br /> Such an investor has less interest in the fate of the enterprise whose shares they have purchased. They care about the enterprise only in terms of the paid dividends. On the one hand, the founder of the share capital establishes the enterprise not only for personal gain but with the intention of attracting participants to the production process within the enterprise. The interest of future participants is focused on earning as much profit as possible, which is not of special importance for the founder. On the other hand, the recipient of investments loses interest in the further fate of shares circulating in the market as a result of their placement and receipt of sought investments. They are concerned about share price in terms of the prospects of successful placement during subsequent emissions.<br /> In this this situation, the general public and the state, as the expresser of unified interests, are the most interested in satisfying the interests of both investor (focused on earning maximum income) and the enterprise and entrepreneur (focused on successful industrial activities). The objective of a sound economic policy is to attract capital dispersed among the population to serve industrial objectives. Such economic policy aims on the one hand, to eliminate contradictions between the interests of shareholders and, on the other hand, to protect the interests of capital producers and recipients.<br /> Legislators in the post-communist space, influenced by illusions and the objective to attract foreign investments at any cost, often develop laws that primarily appeal foreign investors. They tend to overlook potential domestic capitalists with cash resources. These stereotypes and illusions significantly impacted the so-called “first wave” investment legislation. <br /> Legislation in the post-communist domain defines investments as cash resources, designated bank deposits, shares, stocks and other securities, technologies, machinery and equipment, licenses (including trademarks), credits, and any other properties and ownership rights. It also includes intellectual values placed in industrial and other activities to earn profit (income) and achieve a positive social effect.<br /> This definition reflects the essence of regulated relations, representing the movement of self-growing capital value. However, if we consider the additional purpose of achieving a positive social effect, the law aligns with the logic of regulating lease agreement for capital construction, using categories such as customer, object of investment activity, funding investment activity, and state order etc.) <p style="text-align: justify;"><strong>About the Contradictory Nature of Foreign Investments</strong> <p style="text-align: justify;">Legislative acts adopted in the 90s significantly shaped the contradictory nature of legislation regarding foreign investments. The main contradiction in the law on foreign investments lies in the inconsistency about the subject of regulation presented in the law earlier. According to the Law on Foreign Investments, foreign investments are defined as all types of proprietary and intellectual values placed by foreign investors to earn profit (income). This law regulates the methods for implementing investments, essentially explaining the term “investment” in a legislative context.<br /> The main defect of such a distributed description of the category of Investments is that the legislators neglected the economic essence of this regulated phenomenon. As a result, the definition of this term is evidently flawed.<br /> The legislation overlooks the economic essence of investment and the economic form of capital as the movement of self-growing value (Qoqiauri L., 2014, pp. 181-182).<br /> Such acquisition of property by foreigners remains a simple purchase of property. Materially, this is merely spending of money and exchanging it for consumer values. An individual becomes an investor only when placing their capital as a means to earn income, echoing Marx’s concept of “overpriced”. In such a situation, it is essential for foreign investor to have certain guaranties from the government of the host country where the investments are made. This necessity arises because deficiencies in the laws introduced at that time – such as the Law about Investment Activities and the Law on Foreign Investments - created circumstances where effective regulation mechanisms were not established. The incompletion of the referred legislation highlighted the need to review the mechanisms governing the entire investment activity and the regulation of relations with foreign investors, as well as the need to the to them. <br the deficiencies of the legal presented above, it is to consider from by as an of a certain of whether it in the form of money or be transformed into the capital based on As a result of such it into value from the given of the value. The cannot be about laws on investments. They regulated the of foreign investments in a special <p style="text-align: to and Investment <p style="text-align: regulating issues to the of foreign investors, the Law on Foreign Investments focused on legislative for with foreign /> Consequently, the necessity for the introduction of a wave” of legislation on and investment remains <br />The most important problems of and investments in any of the for industrial mechanisms and investment are as />• of the share of financial and intellectual resources of the for />• Ensuring and in the movement of financial and intellectual investment />• investments the implementation of industrial and individual investment />• various investment process within to achieve an of investments and their />• Ensuring of investments by the of their of and financial and intellectual to the /> The of the aforementioned problems requires special It in impossible to between the financial and intellectual of investments real investments through their real and financial However, for a between of such is possible only to a certain This is to the specification of the forms of real and economic and not to the criteria of of the investment financial resources or the level of of each real process. achieve of resources, />• There is relevant of real investment, by the of real public along with the of real investments, and of to real investment />• of the public is in the market at the /> However, the result of effective real investments is not to be at the property created as a result of investments is to free of or at favourable This includes services for the main producers of such as the in such as etc. and of Investment in the Economic Development of a <p style="text-align: justify;">The role and importance of investment policy in a economic development are It depends existing investment potential within the national economy and the effective of its relevant resources, which to sustainable economic growth, of investment and reproduction of main industrial This is achieved through the development of a investment <br /> State regulation of investment encompasses a of forms and to and state interests and between accumulation and investments. It involves activities in the investment indicative regulation and state (Qoqiauri L., pp. /> In investment and investment policy can be at of - state, and The objectives of investment policy, as above, are to conditions for investment potential. These objectives />• Creating an of the object as attractive for investments />• the of investment />• Direct investments;<br />• investment resources of the />• investment resources of an />• Achieving economic of the investment /> State regulation of the investment domain in the economy should ensure the regulation of investment activities and the of complex This aims to the development of various of public and the of economic these tasks the indicative regulation of investment activities. <p style="text-align: for the of of Investment <p style="text-align: justify;">The essence of indicative regulation principles lies in of capital and state interests by goals development along with mechanisms for their /> To several for the implementation of indicative regulation principles in investments have been /> financial and industrial and other are /> significant capital is interested in with the /> And the free cash resources of the population a potential of /> In view of the significant can be it is to new instruments for state regulation in the field of investments. favourable climate for capital investments be with the in the general economic and the objectives of /> real for the investment not on by the market it is essential to direct the investments, while to market to address the task of economic in the /> The of the principles of indicative regulation of investments is based on the following The role is through the of investment that between the state and capital investors. The policy in the investment market is in agreement with /> the implementation of interests of the in the for investment development and creating favourable terms for investments. To achieve the state should address the /> of the investment process. Several models of the investment process are in the and of economic development of the country. is characterized by its specific objectives and of economic development and foreign economic these models to from one to and The of investment process is providing a for the development, effective economic growth, and addressing various and political objectives faced by the The following types of investment process models are <br />• Investment process the conditions of of the economy, with state />• of investment process the conditions of />• of investment />• and distributed of investment />• of investment process for a State regulation of the economy involves strategic and planning for the development of various and This is achieved through and the implementation of investment process in the real of /> In with common state interests and the government is to supporting the development of ownership This includes various and other such as additional financial financial resources in of the sectors and of State in Investments</strong> direct investments, where the investor has control over the situation, the implementation of portfolio investments requires state The objective of legal regulation is to an environment in which investors can the investment prospects of a and, if from and interested in case of any of their portfolio investors should be with legal These objectives are achieved through the following />• a special state which be authorized to the of and legal />• to relevant about the of the />• specific and the activities of participants or other services to investors, particularly in the of /> implementing portfolio investments, foreign portfolio investors face the risks as investors. there is need to any special regulations or mechanisms specifically for foreign portfolio investors. However, it should also be that the state, whose and legal entities as portfolio investors, can the activities of the recipient state of the portfolio investments. This control of the market by the a state the receipt of investments but to control the it is for portfolio investors to from Consequently, should be for the regulation of portfolio /> when determining the principles of between direct and portfolio investments, the following opinions should /> considering the interests and of the state, direct investments should be to less favourable domain and investment level of which risks of failure as in guaranties should be for such investments, such as that the enterprise not be a certain level of is achieved or for any loss if the enterprise does not the expected due to the objective a of out to be for industrial /> the interest of the investor should be in terms of direct investment. In other the investor should their intention not only to capital in the but also to participate in the process, share technologies, and in other forms of personal <br /> State legislation criteria and by which investments be as direct and or portfolio investments. These criteria the of the investments, the share of the and the specific legal form of investments. 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