Modeling of fixed investment behavior of the forest products industry in the Pacific Northwest and South

A theoretical and empirical study of the investment behavior of the forest products industry at the regional level has been neglected, even though the importance of the industry to regional economies is clear. Annual new capital expenditures by the lumber and wood products industry (SIC 24) and paper and allied products industry (SIC 26) in the Pacific Northwest and South from 1964 to 1996 were analyzed. An autoregressive model, AR(1), incorporating the growth rate of output (value of shipments), a nonlinear trend variable, an uncertainty measure, and a dummy variable for the pre- and post-1988 period best fit the data.; The new capital expenditures patterns for the lumber and wood products industry followed a significantly nonlinear trend over the study period while the new capital expenditures for the paper and allied products industry did not, indicating the differences of capital formation between industries. The cyclical investment period for the lumber and wood products industry is shorter than that for the paper and allied products industry.; The empirical results showed some types of uncertainty are positively associated with investment while other types are negatively associated. The evidence presented in the study supports neither the irreversible investment theory by which a negative correlation between investment and uncertainty is explained, nor the theory of convexity of the marginal product of capital by which a positive correlation between investment and uncertainty is explained.; The harvest restrictions in the Pacific Northwest had more impacts on new capital expenditures in the South than in the Pacific Northwest. Southern investment increased significantly after the harvest restrictions were imposed. Pacific Northwest investment has been declining over time, but no significant shifts occurred after restrictions were imposed.; Five-year (1997–2001) forecasts showed that new capital expenditures by the lumber and wood products industry in the South would continuously increase with a lower growth rate and would reach a relatively stable period from 1997 to 2001. New capital expenditures by the lumber and wood products industry in the Pacific Northwest would decease from 1997 to 2001. New capital expenditures by the paper and allied products industry in the Pacific Northwest and South would continuously decrease from 1997 to 2001.