Investment, Markup and Capacity Utilization in Tunisia

Using data from the Tunisian private manufacturing sector, a theory-consistent model of the investment behavior is estimated. In this model, investment is entirely profit-driven where the profit variable is decomposed into three components: the markup rate on variable costs, the capacity utilization rate and the discrepancy between the optimal and the actual capital-labor ratios. These three components can be related to the usual three determinants of investment: profitability, pressure of demand and relative factor costs respectively. The interpretation of coefficients and the formulation are however different. The econometric investigation demonstrates a clear and strong statistical relationship between investment expenditures and these three determinants.