doi.org/10.52340/eab.2025.17.01.08

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.
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.
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.
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.
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.
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.
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.
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.
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:
• 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);
• Ensuring competition in industrial activities and creating fair, legislative conditions for other entrepreneurs.

Keywords: Iinvestment, investment activity, investment legislation, foreign investment, legislation, indicative regulation, investment process.
JEL Codes: E22, E65, F21, G24

Introduction

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.
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.
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.
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.
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.
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.
Hence, the necessity of addressing the aforementioned problems entails the need to achieve the following objectives:
• State and legal regulation of direct and portfolio investments;
• Provision of the fundamental objectives of the government in the investment process; establishment of criteria for the interrelated planning of real and financial investments;
• 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.

Investment Domain - the Foundation for Reproduction and Development of Economic System

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.
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.
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.
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.
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).
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.
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.
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.
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.
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.)

About the Contradictory Nature of Foreign Investments

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.
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.
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).
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 change the approach to them.
Regarding the deficiencies of the legal provisions presented above, it is necessary to consider another quote from Capital by K. Marx: “Money, as an independent expression of a certain value, regardless of whether it exists in the form of money or goods, may be transformed into the capital based on capitalistic production. As a result of such transformation, it turns into self-growing, increased value from the given size of the value. The same cannot be said about our laws on investments. They regulated the issue of foreign investments in a special manner.”

What Problems Necessitate Amendments to Investing and Investment Laws.

Rather than regulating issues related to the status of foreign investors, the Law on Foreign Investments focused on legislative provisions for enterprises dealing with foreign investments.
Consequently, the necessity for the introduction of a “second wave” of legislation on investing and investment remains relevant.
The most important problems of investing and investments in any society (regardless of the model for industrial mechanisms and investment development) are as follows:
• Determination of the optimal share of real, financial and intellectual resources of the society used for investment;
• Ensuring relevance and proportionality in the movement of real, financial and intellectual investment processes;
• Directing investments towards the implementation of industrial fields and individual investment projects;
• Observing proportionality across various joint investment process within society to achieve an optimal structure of total investments and their respective types;
• Ensuring high effectiveness of investments by aligning the acceleration of their turnover, relative reduction of expenses, and real, financial and intellectual effectiveness efficiency to improve the useful return.
The latter of the aforementioned problems requires special specification. It is, in fact, impossible to establish full correlation between the real, financial and intellectual efficiency of investments (i.e., real investments measured through their real and financial aspects). However, striving for a more complete correlation between them is, of course, desirable. Yet, such aspiration is possible only to a certain extent. This limitation is related to the specification of measuring the monetary forms of real and economic processes, and not to the criteria of profitability of the investment financial resources or the level of subordination of each real process.

We achieve high profitability of investment-financial resources, when:
• There is relevant high effectiveness of real investment, measured by the creation of real excess public wealth, along with the relative growth of real investments, and relative reduction of expenses related to real investment resources;
• Additionally, part of the increased public wealth is sold in the market at the highest price.
However, the result of effective real investments is not always required to be sold at the highest price. Often property created as a result of investments is purposefully transferred to consumers free of charge or at favourable prices. This includes high-quality services for the main producers of society, such as the workforce, in areas such as upbringing, education, culture, scientific service etc.

The Role and Importance of Investment Policy in the Economic Development of a Country

The role and importance of investment policy in a country’s economic development are significant. It heavily depends existing investment potential within the national economy and the effective application of its relevant resources, which finally ultimately leads to sustainable economic growth, recovery of investment potential, and expanded reproduction of main industrial funds; This is achieved through the development of a modern investment policy.
State regulation of investment processes encompasses a variety of forms and methods, aiming to unite private and state interests and establish rational proportions between consumption, accumulation and investments. It involves coordinating forecasting activities in the investment market, indicative regulation and state impact intervention (Qoqiauri L., 2013. pp. 174-180).
In our opinion, investment composition and investment policy can be considered at different levels of management: - state, regional and industrial. The primary objectives of investment policy, as stated above, are to create optimal conditions for activating investment potential. These objectives include:
• Creating an image of the object as attractive for investments (country, region, industry);
• Establishing the image of investment attractiveness;
• Direct budgetary investments;
• Utilizing investment resources of the banking system;
• Mobilizing internal investment resources of an enterprise;
• Achieving economic outcomes of the investment policy.
State regulation of the investment domain in the economy shall should ensure the regulation of investment activities and the coordination of complex integral elements. This aims to optimize the development of separate various fields of public farming and enhance the interaction of economic entities. Addressing these tasks may involve the indicative regulation of investment activities.

Real Preconditions for Implementing the Principles of Indicative Regulation of Investment Activities

The essence of indicative regulation principles lies in harmonization of private capital and state interests by establishing agreed-upon goals development tasks, along with mechanisms for their achievement.
To date, several preconditions for the implementation of indicative regulation principles in investments have been established:
First, large joint-stock companies, financial and industrial groups and other structures are emerging.
Second, significant capital is increasingly interested in cooperation with the government.
And third, the temporarily free cash resources of the population represent a potential sources of investments.
In view of the aforesaid, two significant conclusions may can be drawn. First, it is necessary to seek fundamentally new instruments for state regulation in the field of investments. A favourable climate for capital investments must be created, aligning with the substantial changes in the general economic situation and the objectives of stimulating savings.
Secondly, real alternatives for overcoming the investment crisis do not rely on savings generated by the market participants. Currently, it is essential to direct even the smallest savings towards investments, while adhering to market principles, to address the critical task of economic recovery in the private entrepreneurship sector.
The realization of the basic principles of indicative regulation of investments is based on the following instruments: 1. The leading role is established through the signing of investment agreements that outline mutual obligations between the state and leading capital investors. 2. The pricing policy in the investment market is determined in agreement with entrepreneurs.
Third, the implementation of mutual interests of the parties in executing the strategy for investment development and creating favourable terms for investments. To achieve this, the state should address the following:
Models of the investment process. Several models of the investment process are considered in the theory and practice of economic development of the country. Each model is characterized by its specific objectives and tasks. At different stages of country’s economic development and under varying foreign economic conditions, these models exibit flexibility, allowing them to transition from one stage to another and vice versa. The model of investment process is completed comprehensive, providing a framework for forecasting the country’s development, promoting effective economic growth, and addressing various socio-economic and political objectives faced by the state. The following types of investment process models are considered:
• Investment process under the conditions of full liberalization of the economy, protected with state intervention;
• Model of investment process under the conditions of complete liberalism;
• Mobilization model of investment process;
• Planned and distributed model of investment process;
• Model of investment process for a mixed economy.

State regulation of the economy involves strategic forecasting and planning for the development of various fields and entities. This is achieved through comprehensive taxation and customs benefits, facilitating the implementation of investment process in the real sector of economy.
In aligment with common state interests and tasks, the government is committed to supporting the development of different ownership forms. This includes offering various taxation and other benefits, such as additional financial preferences, distribute governmental financial resources in favour of the preferable sectors and entities.

The Necessity of State Interference in Implementing Portfolio Investments

Unlike direct investments, where the investor has complete control over the situation, the implementation of portfolio investments requires state intervention. The objective of legal regulation is to create an environment in which investors can objectively assess the investment prospects of a particular entity and, if necessary, receive qualified assistance from independent and interested experts. Additionally, in case of any violation of their rights, portfolio investors should be provided with legal protection. These objectives are achieved through the following methods:
• Establishing a special state agency, which would be authorized to oversee the issuance of securities and enforce legal requirements;
• Mandating issuers to provide relevant information about the status of the entity;
• Setting specific requirements and overseeing the activities of professional participants who offer consulting or other professional services to investors, particularly in the context of securities investments.
When implementing portfolio investments, foreign portfolio investors face the same risks as local investors. Therefore, there is no need to request any special regulations or mechanisms specifically for foreign portfolio investors. However, it should also be noted that the state, whose natural persons and legal entities act as portfolio investors, can influence the activities of the recipient state of the portfolio investments. This necessitates adequate control of the securities market by the state. If a state permits the receipt of investments but fails to control the securities market, it is advisable for portfolio investors to refrain from investing there. Consequently, countries should be oriented towards standard requirements for the regulation of portfolio investments.
Thus, when determining the principles of separation between direct and portfolio investments, the following opinions should guide us:
Firstly, considering the interests and policies of the state, direct investments should be attracted to less favourable domain (e.g., high costs and long-term investment redemption, low level of return), which inherently carry high risks of failure (such as in geology, mining works). Additional guaranties shall should be provided for such investments, such as assurance that the investor’s enterprise will not be liquidated until a certain level of profitability is achieved or partial compensation for any loss incurred if the enterprise does not yield the expected results due to the objective reasons (e.g., a discovered deposit of useful materials turns out to be unsuitable for industrial exploitation).
Secondly, the interest of the investor themselves should be considered in terms of direct investment. In other words, the investor should express their intention not only to invest capital in the entity but also to participate in the manufacturing process, share experience, utilize technologies, and engage in other forms of personal involvement.
State legislation may establish formal criteria and indicators by which investments will be classified as direct and or portfolio investments. These formal criteria may include the size of the investments, the share of the investor’s participation, and the specific legal form of investments. It should be noted that these formal criteria ultimately reflect the so-called “control theory”. According to this concept, a direct investor maintains the opportunity to control the resources they have invested and to participate in the industrial activities of the enterprise in the form of “industrial exploitation of capital”.
The peculiarity of the investment category in a post-communist context lies in its origin from the socialist planned system of industry. A distinguishing feature of the planned economy was that cash resources were considered as a conditional unit of measurement of price, representing the expression of spent labour. Under the conditions of socialism, cash resources could not be transformed into the monetary capital and were never considered to be capital in the sense of self-growing value. Capital was viewed as a tool for exploitation of the workforce and the appropriation of surplus products. Consequently, the former USSR legislation did not include legal norms addressing the movement of monetary capital and the implementation of investments.
At the same time, the development of any manufacturing process requires the mobilization of resources (both material and labour). Ancient civilizations, such as the Egyptians under pharaohs, could undertake large-scale public works based on their perceived necessities, without the use of money. However, political systems with varying degrees of power could not facilitate investment (including wealth improvement and accumulation) until the development of monetary systems. Hence, “money becomes the means for replacing power, providing economic growth and transferring into the instrument for collective production of goods” (Strange S. 1998, pg. 94).
The rejection of cash and monetary capital for ideological purposes, as seen in the former USSR, did not solve the challenges of mobilizing resources for the expansion of production.
Firstly, It’s important to recognize that rejecting role of money, and moreover the importance significance of monetary capital in production development, does not mean the rejection of money itself. Mone existed during socialism, even during the times of the rationing system. The key difference between capitalist (market) economies and socialist (planned) economies is that in the former, the authority to issue credit is divided between the state and private banks, whereas in the latter, the state simply transfers this authority to state banks. These state banks operate under the guidance of state planning agencies rather than market demands. (Strange S. 1998. pg. 90.)

Conclusion
In regulating direct investments and incorporating investment activities within legislative frameworks, the state should aim to achieve the following goals:
Creation of favourable conditions for the implementation of general industrial activities by introducing appropriate legislation, ensuring adherence to establish norms and creating fair and predictable systems;
Promote competition in industrial activities and establish fair conditions for other entrepreneurs.
When the state successfully achieves these tasks, its presence in the market is generally unnoticed by national (local) investors. For foreign investors, however, there is a risk of encountering unfriendly actions solely because they are foreigners (whether natural persons or legal entities). International agreements and the development of international legal norms and general principles in modern conditions ultimately prevent discrimination against foreign investors. Ensuring fair conditions for competition in the national market equally benefits both local and foreign investors. Therefore, it is essential to safeguard specific legal norms, international agreements, and contracts that regulate investments in direct, financial and intellectual capital.

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