Investment may be defined as expenditure on physical assets which are not for immediate consumption but for the production of consumer and capital goods and services.
Investment has two related meanings:
- It could mean the actual production of real capital in economic theory such as building of new factory, purchase of new vehicles, etc.
- It could also mean, in financial term, the deposit of money in bank, purchase of stock or government securities, etc.
Types of investment
- Individual investment: This is the type of investment embarked upon by a household or an individual in order to increase his income and raise his standard of living. Examples include investment in houses, motor vehicles, etc.
- Corporate investment: This includes investment by companies and other organisations with the sole aim of making profits. Examples include investment on plants and machinery, buildings, etc.
- Government investment: Government investment includes the setting up of corporations with the sole aim of providing essential services rather than making of profits, e.g. provision of electricity, water, health care services, etc.
Factors that Determine Investment
- Savings: The amount of money saved determines, to a large extent, the level of investment.
- Level of income: The higher the income earned, the higher the level of investment and vice versa.
- Rate of taxation: Higher taxation on one’s income reduces investment and vice versa.
- Interest rate: High interest rate charged by banks discourages borrowing, which leads to low investment while low interest rate encourages borrowing leading to high investment.
- Future expectation: When an investor expects a brighter future, this will encourage him to invest.
- Business atmosphere: Investors are more interested in investment in a stable economy than those with economic instability.
- Changes in technology: The level of investment is greatly influenced by changes or improvements in techniques of production through inventions and innovation.
- Changes in level of consumption: A high level of consumption generally leads to low investment and vice versa.
- Profit earned: High profits earned by individuals or firms do encourage investment while low profits discourage it.
- Political climate: Investment thrives in a politically stable environment while investment is reduced in places with political instability.