Экономические науки / 4. Инвестиционная деятельность и фондовые рынки

Onyusheva I.V., PhD, Professor of RAM, RANH,

Sarkissyan S.E.

University of International Business, Almaty, Republic of Kazakhstan

The Concept of an Investment Project, Its Types and Features

Key Words: investment project, strategic competitiveness, competitive advantage, average returns, above-average returns, strategic management process.

In this article we are going to define the notion of an investment project, to classify its types and features and to elaborate a key question “why do we need to invest?”

In order to build your wealth, you will want to invest your money. Investing allows you to put your money in vehicles that have the potential to earn strong rates of return. If you don’t invest, you are missing out on opportunities to increase your financial worth. Of course, you have the potential to lose your money in investments, but if you invest wisely, the potential to gain money is higher than if you never invest.

An investment project is a comprehensive action plan, which includes the design, construction, acquisition of technology and equipment, training, etc., aimed at creating new or upgrading existing production of goods (works, services) in order to obtain economic benefits [1].

It is a long-term allocation of funds (with or without recourse to the project's sponsor) to carry an investment idea through to its stable-income generation stage. A viable investment project aims at achieving a profitable return that ensures timely payment of interest and principal, attractive return on the invested capital, and positive and consistent cash flows [2].

In this context an investment project can be defined as an optimal set of actions of investment based on sector, global and coherent planning on the basis of which a defined combination of human, material and other resources leading to economically and socially determined development.

Any projects, whether they are investment or not, vary so much that they are difficult to define. In order to clarify the notion of project let us consider some definitions offered by different sources (see Table 1 below).

Table 1 - Overview of definitions ‘Project’, ‘Investment’, ‘Investment project’

No.	Definition	Source
1	A project is a unique venture with a beginning and an end, conducted by people to meet established gals within parameters of costs, schedule and quality.	Buchanan and Boddy [3]
2	A project is a set of resources temporarily assembled to reach a specified objective, normally with a fixed budget and with a fixed time period.	Mike Field and Laurie Keller [4]
3	A project as the simplest form is a discrete undertaking with defined objectives often including time, cost and quality (performance) goals. All projects evolve through a similar ‘life-cycle’ sequence during which there should be recognized start and finish points	Mike Field and Laurie Keller [4]
4	An investment project is an comprehensive action plan, which includes the design, construction, acquisition of technology and equipment, training, etc., aimed at creating new or upgrading existing production of goods (works, services) in order to obtain economic benefits.	Vilensky P.L., Ryabikova N.Y [1]
5	An investment project is long-term allocation of funds (with or without recourse to the project's sponsor) to carry an investment idea through to its stable-income generation stage. A viable investment project aims at achieving a profitable return that ensures timely payment of interest and principal, attractive return on the invested capital, and positive and consistent cash flows.	Business Dictionary [2]
6	An investment project is an allocation of resources with the expectation of a profitable return on the allocation in the future. The return is typically anticipated more than a year in the future.	Kovalev V.V [5]
7	An investment is the current commitment of money or other resource in the expectation of reaping future benefits.	Zvi Bodie, Alex Kane, Alan J. Marcus [6]
Note: Compiled on the base of [1-6].

From the definitions we notice that in order to apply a project it needs a set of means, different in their nature, which, to be operated, must rely on well-coordinated actions.

In other words, any activity must take place in a pre -established order, not too early as this may mean a waste of resources, but not too late, as this may compromise the project’s purpose itself.

Finally, the project must have a well-defined and quantified purpose which, even if it cannot be assimilated with the purpose of the programme it derives from, must contribute to its achievement. The investment project is the concrete motivation of some current expenses in the hope of future benefits. Its specific features, distinguishing it not only from current activities, but also from other types of projects, are: amplitude, finality and structure [5].

The execution of any investment project is under the pressure of two factors: time and cost. For managers, but also for the other factors involved in the project, respecting the periods for execution and the consumption of resources: human, material, financial, technical etc. is a permanent preoccupation during execution. But for this they need adequate tools and techniques, both for the correct dimensions of the time and resource parameters and for later monitoring and control on site.

The shaping of the execution process is based on a specific trait of projects, namely that their execution is a complex structure of activities in a specific technological and constructive interdependence, characterized by: assimilation with a certain role during the execution of the project; not performing an activity may affect execution, the finalizing time or may compromise quality or cost objectives; strict time delimitation, with a clear beginning and ending; consumption of resources: material, financial, human and time, with a specific cost and available within limits; connection with at least another activity through a relation of anteriority which, technologically speaking, shows that it cannot start even if only one of the previous activities is not completed- possible partial superimpositions are accepted in particular circumstances.

The activities which contribute to the execution of a project are of three types:

- Actual - consuming resources and time;

- Expectations- consuming only time;

- Fictitious- consuming neither time nor resources, being just technological conditioning between certain activities in the first two categories.

For an investment project to succeed it is firstly necessary a common conception of the problem and its definition together with the beneficiary, a conception that implies: the clarification of the positions of those involved and the clear definition of the project theme, which means defining the objectives of the project, elaborating the strategy, planning the necessary means, tools and stages. The clear, quantifiable results of the different stages of the project will allow qualitative and quantitative evaluation, as well as an evaluation of reaching the objectives; the setting of ways and rules of cooperation with the beneficiary all along the project, an aspect that will allow clarification of language misunderstandings, interpretation of tasks, avoidance of conflicts, re-evaluation of different problems concerning the execution of the project al minimal expenses. Solving conflicting situations that occur in any project is easier if there is a basis for mutual trust, partnership and understanding the position of each participant in the project; access to information and provision of quality information by promoting information policies on the progress of the project that must be open, clear, unbiased for negative interpretation.

The information must be fairly complete, accurate, sent in adequate form and in due time to those using it in making decisions or in performing an activity, so that it allows a correct estimate of the situation at any time; a realistic evaluation of the resources available for the initiation and performance of the project.

The execution of an investment project cannot start on the idea that the source for certain facilities will appear later, when its use is urgent [5].

Classification of investment projects can be carried out on several grounds. Thus, depending on their mutual influence investment projects can be divided into:

- Independent, when the decision to adopt a single project does not affect the decision to accept the other one. In order to separate an investment project A from the project B, two conditions must be done:

- Should be possible (technical, technological) A draft implement regardless of whether or not a project B is accepted;

- The cash flows expected from project A, should not affect the acceptance or rejection of the project B.

Sometimes the company due to lack of funds cannot simultaneously carry out two projects. In this situation, the adoption of the project will entail rejection of the second. However, calling the projects dependent only on the basis that an investor hasn’t enough funds for their simultaneous realization, would be wrong.

If the decision to carry out a project has an impact on another project, that is, the cash flows of the project "A" changes depending on whether accepted or rejected the project "B", the projects are considered to be dependent. These projects can be also divided into the following types:

- Alternative (mutually exclusive), in which two or more projects cannot be realized at the same time, and the adoption of one of them automatically means that the other project cannot be implemented. For example, on a dedicated piece of land we can be built either shop or dining room or parking, the adoption of one of these projects automatically makes it impossible for the implementation of others;

- Complementary, when the realization of several projects may occur only together. Thus complementary projects can be divided into:

- Complementary, when the adoption of a single investment project leads to an increase in revenues from other projects;

- Projects related to each other substitute relationship when the adoption of a new project leads to some reduction in income from one or more existing projects. Identification of complementarity and substitution relationship implies prioritization of investment projects not isolated, but in the complex, especially when the acceptance of an investment project by chosen criteria is not obvious [8].

Picture 1 – Classification of investment projects

Note: Compiled by the author on the base of [4,5].

Let us highlight the classification of investment projects according to picture 1

Scope of the project (social importance) project is influenced by the results of its implementation for at least one of the (internal or external) markets: Financial products and services, labour, etc., as well as the economic and social situation.

Depending on the importance scope of the project, they divided into:

- Global, the implementation of which significantly affects the economic, social and environmental situation in the world;

- National economy, the implementation of which significantly affects the economic, social and environmental situation in the country;

- Large-scale, the implementation of which significantly affects the economic, social and environmental situation in certain regions or sectors of the country;

- Local, implementation of which has no significant effect on the economic situation in the region and does not alter the level and structure of prices in the commodity markets [10].

Investment purposes. A key feature during the classification of projects. Picture 1 highlighted seven major groups of projects.

-Increasing efficiency in production. These projects are aimed mainly at reducing costs through the use of resource-saving technologies, advanced materials, more efficient equipment, better work organization, training of employees, and so on.

- Investments in the expansion of existing production. Projects of this type include increasing production capacity due to the increased demand for the company's products.

-Investment in the creation of new production/industries. Such projects are mainly aimed at new construction or reconstruction of existing enterprises for the production of new products.

-Investments related to entering new markets. Such projects often include:

1. Expansion of production (if not existing market oversaturated products of the company);

2. The adaptation of products to the characteristics of the new markets (safety requirements and ergonomics, national characteristics, climatic conditions);

3. Development of means of delivery, advertising, after-sales service.

Investments in research and innovation. Projects aimed at research work, development work, the development of new technologies and so on. They play a crucial role in today's dynamic world. Despite the unpredictability of the results of such projects, large companies spend a lot of money for implementation of such projects

Investments in social purposes. The purpose of these projects is to solve certain social problems (the construction of holiday homes, sports centres, hospitals, kindergartens and so on.). Similar projects have an obviously costly effect, although it is likely an indirect economic benefit.

Investments made in accordance with the requirements of the law (forced investments). The objectives of these types of projects are the implementation of legislation:

- The environment (protection of air and water, recycling and disposal of toxic waste, etc.);

- Sanitary-epidemiological norms;

- Fire safety;

- Labour Protection & Safety Department;

Examples of such projects are:

- Construction of sewage treatment plants chemically polluted drains;

- Construction of burial of toxic waste [5].

Type of intended effect. Evaluation of the projects can be carried out according to various criteria. The results in the implementation of the projects do not always have the character of an obvious profit. Some projects unprofitable in economic terms, can generate indirect revenue through reliability and stability in the supply of raw materials and materials, to enter new markets of raw materials and product sales, achieve social impact, reducing costs on other projects

In this case, the criteria for assessing the advisability of investing in the project, based on formal algorithms can give way to formalized criteria.

We can select the following types of effects:

- Expenses reduction;

- An increase in income;

- Reducing the risk of production and marketing;

- The acquisition of new knowledge;

- Social effect.

Relationship type. Identifying of different relations of interdependent investment projects is very important for their analysis.

Projects are called independent if a decision on the adoption of one does not affect the decision on the acceptance of others. The project is called alternative or mutually exclusive, if the adoption of one of them means that the rest must be rejected.

Interconnected projects with complementarity, if the adoption of a new project contributes to the growth of income of one or more other projects. For example, the construction of the service center is accompanied by not only the income from the provision of services by the center, but also the growing number of customers of the main products raised the prospect of possible repairs of purchased products. Identifying relationship of complementarity implies consideration of projects in the sector, rather than in separately. This is particularly important when the decision on the main criterion of the project is not obvious - in this case, additional criteria, including the presence and degree of complementarity should be used.

Projects interconnected relationship of substitution, if the adoption of a new project leads to some reduction in income from one or more existing projects.

Attitudes toward risk. Project may be risky or risk free, but it is quite difficult to find risk free projects because risk itself presents in any project implementation [10].

Since we have touched upon the basic principles of investment project, let us look through a project life cycle. Projects have a definite start and finish point within which their objectives need to be fulfilled. This is known as the project lifecycle. While this is usually defined by a start and finish date, the lifecycle of a project can also be defined by a finite resource such as money or a fixed amount of staff time available to the project.

Most projects can be divided up into five basic stages and processes. Terms that are commonly used for these are:

-initiation (or start)

-planning and development

-production and implementation (execution)

-monitoring and controlling

-closing

All projects will use these basic elements but at a level appropriate to the size and complexity of the project.

Initiation. It is a formal beginning of a project and will be triggered by the issue of the project which briefly describes the purpose of the project, and authorizes budget expenditure. The initiation stage is where work is carried out to assess what needs to be done and how best to do it with whatever resources are available.

Planning and development. After the high level planning done during initiation, a more detailed phase of planning and development usually occurs. The result should be a clear specification for what needs to be done, who by, and when.

Production and implementation. At this stage, it is important to ensure that the project remains focused on its objectives and that any factors which could affect the execution of the project are closely monitored.

Monitoring and controlling. Throughout the production and implementation stage the ongoing progress of the project must be monitored. Progress must be controlled and any issues which arise as a result of the day-to-day work must be dealt with.

Closing. Closing is the last phase of any project and is when the work done is formally accepted and the project is dissolved. Closure does not necessarily mean success, but simply the final point of the project - when failed projects are cancelled, for instance, they should also be closed [11,12].

To sum up, an investment project is a complex and labour intensive work that should be done by various specialists. An investment project should be economically proved and be prepared to generate money in the future. Also we have overviewed the classification of investment projects and found out that there could be different types of investment projects, different purposes and different outcome of any investment project. We have touched upon a life cycle of investment project – it consists of several stages or life cycles that should be done or accomplished one by one. Usually many investment projects have this life cycle, but still it depends on the exact case. In next subchapter we are going to come closer to the fundamental aspects of economic efficiency of investment project, we will briefly cover the methods of evaluation of economic efficiency of investment project.

References:

1. Vilensky P.L., Ryabikova N.Y. Recommendations for calculations of economic efficiency of investment projects. - Moscow: Finance and Statistics, 2003.

2. Business Dictionary, http://www.businessdictionary.com. [Electronic source: last data access: 07.10.16]

3. Buchanan and Boddy. The Expertise of the Change Agent: Public Performance and Backstage Activity, 1992. - P.8.

4. Mike Field and Laurie Keller. Project management, 1997. – 450 p.

5. Kovalev V.V. Methods for evaluation of investment projects. - Moscow: Finance and Statistics, 2003. – P.144

6. Zvi Bodie, Alex Kane, Alan J. Marcus. Essentials of investments, 2010. – 722 p.

7. Eng. Ec. Ph.D. Student Ioan HURJUI; Ştefan cel Mare University of Suceava. Investment projects: general presentation, definition, classification, characteristics the stages”; No.8, 2008.

8. V.V. Kovaleva, V.V.Ivanova, V.A.Lyalina. Investment: the book. – Мoscow: «Welbi», 2003. – 324 p.

9. Harold Bierman, Seymour Smidt. The Capital Budgeting Decision: Economic Analysis of Investment Projects, 2007. – 402 p.

10. Lipcic I.V., Kossov V.V. Investment project. –M.: BEK, 1996. – 452 p.

11. Lock D. The essential Project Management, 3^rd edition, Gower Publishing Ltd.,2007, - 204 p.

12. Lock D. Project Management, 9^th edition, MPG books Ltd., 2007, - 520 p.