Investment

An investment is an asset or item that is purchased with the hope that it will generate income or
will appreciate in the future. In an economic sense, an investment is the purchase of goods that
are not consumed today but are used in the future to create wealth. In finance, an investment is a
monetary asset purchased with the idea that the asset will provide income in the future or will be
sold
at
a
higher
price
for
a
profit.
Impact on output
Cumulated investments over time give rise to capital, opening the path to improvements
in production conditions.

Production capacity, potential productivity, cost effectiveness, production and

process quality will be all increased by properly-oriented investment. Export competitiveness
should also rise.
Employment can fall if a labor substitution investment prevails with real output growing less
than physical productivity.

Determinants of Savings
1. The Level of Income2. Consumption Motivation- the consumption pattern of a person is based on his budget
constraint and the desire to save. However, any rational balancing in consumption
decisions is far from frequent.
3. Wealth- Out of current income a person would consume more and save less if he feels
that his life in future is well secured.
4. Population- an economy experiencing population growth may be forced to save by
sacrificing unnecessary consumption. However, this may not be so if majority of the
population are below the poverty line.
5. Price level
Investment Demand Determinants
1. Interest rate- Higher interest rates tend to reduce the quantity of investment, while lower
interest rates increase it.
2. Expectations- As expectations change in a way that increases the expected return from
investment, the investment demand curve shifts to the right. Similarly, expectations of
reduced profitability shift the investment demand curve to the left.
3. The Level of Economic Activity- Firms need capital to produce goods and services. An
increase in the level of production is likely to boost demand for capital and thus lead to
greater investment. Therefore, an increase in GDP is likely to shift the investment
demand curve to the right.

4. Technological Change- The implementation of new technology often requires new

capital. Changes in technology can thus increase the demand for capital. Advances in
computer technology have encouraged massive investments in computers.
5. Firms have a range of choices concerning how particular goods can be produced. A
factory, for example, might use a sophisticated capital facility and relatively few workers,
or it might use more workers and relatively less capital. The choice to use capital will be
affected by the cost of the capital goods and the interest rate, but it will also be affected
by the cost of labor. As labor costs rise, the demand for capital is likely to increase.

Forms of Foreign Investment

Foreign Direct Investment (FDI) - Foreign direct investment (FDI) is an investment
made by a company or individual in one country in business interests in another country, in the
form of either establishing business operations or acquiring business assets in the other country,
such
as
ownership
or
controlling
interest
in
a
foreign
company.
Foreign Portfolio Investment (FPI) - Foreign portfolio investment (FPI) consists of
securities and other financial assets passively held by foreign investors. It does not provide
the investor with direct ownership of financial assets and is relatively liquid depending on
the volatility of
the
market.
Difference between FPI and FDI
FPI lets an investor purchase stocks, bonds or other financial assets in a foreign country. Because
the investor does not actively manage the investments or the companies that issue the
investments, he does not have control over the securities or the business. However, since the
investors goal is to create a quick return on his money, FPI is more liquid and less risky than
FDI.