Factors Affecting Investment Spending
There are numerous factors affecting investment spending. Generally, investment spending relates to the acquisition and creation of capital goods that are intended for use in the attempts to stimulate production within an economy. Investment spending can be defined as money that is spent on the acquisition or creation of capital goods or goods that are used to produce capital, services or goods. Investment spending can include the purchases of land, machinery, infrastructure and production inputs. It is different from investment because investment is the purchase of the financial instruments which include bonds, derivatives and stocks.
Why factors affecting investment spending are important
Factors that affect investment spending are important because they determine the investment line’s position. Changes in these factors make the investment line to shift. Companies invest for two major reasons.
- To replace the failing or worn out machinery, buildings or equipment. This is called capital consumption and it is necessitated by continuous fixed capital assets’ depreciation.
- To buy machinery, buildings, or equipment that will increase the capacity to produce. This reduces the long-term costs while raising profits and increasing competitiveness.
Factors that affect investment expenditures are important because they determine the amount of money that a firm invests as well as the type of investment it undertakes. The two main types of investments are gross investment and net investment. Gross investment refers to both categories of investment while net investment is the measure of new assets only instead of replacement assets.
Major factors that affect investment expenditures
- Interest rates
Borrowing’s cost is increased by increased interest rates. This implies that borrowing that is aimed at financing most investment expenditures is affected negatively when interest rates are increased. Most firms are less likely to spend money on purchases of capital goods when there are high interest rates. When borrowing costs are low, firms are likely to borrow more and therefore their investment spending increases.
- Capital assets
Capital assets’ accumulation is the aim of investment. This includes accumulation of tools, machinery and buildings. Increasing the capital goods of a business from the previous investment implies that a business will not need further investment spending or purchases. On the other hand, a reduction in capital assets which may occur via depreciation will increase investment spending because the business will have to replace the old, worn out equipment.
When a company is optimistic that the economic prospects will be good and that the economy will improve, it is likely to undertake more investment spending currently even when there is falling or unchanged income. Similarly, when a business is pessimistic about the economy such as expecting a decline in the economy, it is likely to reduce its investment expenditures.
Technology entails the techniques that are used in production. Technology advancement is embodied in the produced goods or the production capital that a company uses. This triggers the need for different capital goods that are needed for production and distribution. Thus, new technology will lead to an increase in investment spending because a business must embrace the latest technology to enhance its operations. A technology drop off in an industry will cause a reduction in investment spending.
- Capital prices
When capital price is low, the capital demanded is higher and when capital price is high, the quantity of the demanded capital is low.
How and when entities consider factors affecting investment spending
Businesses consider factors that affect investment expenditures by analyzing the overall economic situation of the environment within which it operates. They consider factors that affect investment expenditures while planning or budgeting and allocating resources. This is because the amount of money that they spend on investment should be determined by the anticipated return rates and this is largely dependent on factors like the projected economic conditions and interest rates. This implies that overall; a business’ mood at any given time can considerably affect its investment amounts and economic growth’s pace.
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