Determinants of Private Corporate Investment: A Panel VAR and Machine Learning Approach

The pivotal role of private corporate investment in facilitating India’s economic expansion is widely recognized. Nevertheless, the recent slowdown in corporate investment has posed a significant challenge to India’s sustained growth. This study investigates the firm-level determinants of private corporate investment in India using an unbalanced panel of manufacturing firms. It examines how sales growth, bank borrowing, borrowing costs, and internal cash flows influence investment behaviour across heterogeneous firms, including listed and unlisted companies of varying sizes. The analysis combines fixed-effects panel regressions, controlling for unobserved firm heterogeneity, with a panel vector autoregression (VAR) framework to capture dynamic interrelationships among key variables. The findings highlight the critical role of indicators like sales growth, bank borrowing, and internal cash flows in shaping private corporate investment, with implications for policy aimed at promoting investment-led economic growth. Moreover, machine learning techniques are employed to capture non-linearities and complex firm-level interactions, providing further evidence that financing costs and credit conditions are critical determinants of firms’ investment decisions.