The purpose of this chapter is to test how far investment by individual firms was related to profits and to sales in Pakistan in the sixties and to explore in particular how the relationship differed between the first and second halves of the decade. These periods correspond to the Second Five Year Plan (1960/61 to 1964/65) and Third Five Year Plan (1965/66 to 1969/70). Between these two periods ‘boom’ gave way to a ‘slowing down’ and the availability of loans to firms on favourable terms decreased. These loans had an important influence on the financing of investment and the behaviour of firms in Pakistan, where the institutional framework was very different from that of a market economy of the advanced industrial countries in the West.

We start by setting up a simple model of investment behaviour based on the conventionally accepted profit and accelerator theories to ascertain to what extent they provide an explanation of firms' investment behaviour in the sixties. The model is then modified to take into account the peculiar institutional setting in which firms operated in Pakistan, especially the dependence of firms on loans from financial institutions at favourable terms. This institutional setting, termed the ‘corporate environment’ has been explained in Chapter 2, and here we investigate the extent of dependence of firms on loans from financial institutions, especially to bring out the differences over the two plan periods. We then go on to discuss the conditions under which external funds can be incorporated in our model as a factor influencing investment behaviour.