Investment

Investment is expenditure undertaken by firms to add to the capital stock. Investment leads to an increase in the productive capacity of the economy by increasing the stock capital available for production.  Factors affecting Investment include interest rates, business confidence, retained earnings and the level of taxation.

Some firms may choose to borrow money to fund their investments, therefore the interest rate is of direct significance, the higher it is the less investment that will occur and vice versa. It also has an indirect effect. If businesses don’t borrow to invest then they would have to use retained earnings. If the interest rate is high then the firm would be able to save its retained earnings and earn a high level of interest. Therefore high interest rates again lead to less investment as the return on investment will have to be higher than the interest rate.

Taxation affects investment directly as the higher it is, the less retained earnings a firm will have to invest. Indirectly it will reduce the return on investment and thus make investing less attractive. Business confidence is also vital for investment; if it is high there will be more investment and vice versa.

Page last updated on 20/10/13