Information and Investment #2

Chapter IV of Information and Investment is The Co-ordination of Complementary Investments. It concerns investment by an entrepreneur’s suppliers, actual or potential.

It will be necessary to inquire both about the information which entrepreneurs will wish to have and as to the conditions which will permit access to it. It is probably the qualitative assortment of production that complementary investment is of greatest importance.

An entrepreneur needs to recognize that the profitability of his own investment will depend on the terms on which he can obtain inputs, and therefore indirectly on the volume of investment which has been, or will be, undertaken elsewhere. It is possible for two or more firms to be in a complementary relationship without there being transactions between them. For example, the other party could be a supplier to one’s supplier.

A further complementarity results from the fact that investment of any kind, by generating income, will increase the demand for other goods and services. No very close relationship between particular firms is likely to be created by this form.

The problem is to explain how producers may obtain information or assurances about the likely volume of complementary investment sufficiently reliable to persuade them to invest themselves. Complementarity between various lines of production does not imply that investment in them will be simultaneous and coordinated. Although producers may be able, on the basis of implicit collusion, to expect an increase in complementary production, it seems doubtful such expectations could be held with much confidence.

Every business makes plans, with greater or lesser precision, for a set of investment activities. It will be based on an assessment of the various technical and market conditions upon which the prices at which the firm will buy its inputs and sell its outputs. Due to the uncertainty of expectations, an entrepreneur will want to be as flexible or adaptable as possible, to allow for modification. But inflexibility will be to some extent unavoidable, such as due to more or less fixed equipment or personnel. Attempts to secure a more perfect coordination, such as by contracts, may reduce future adaptability.

It is difficult to resist the conclusion that in less developed markets, the coordination of investment, at least in manufacturing, may require more deliberate planning than with advanced markets. Unfortunately, it is in less developed markets that the administrative skill and experience required for such coordination is likely to be absent.