INVESTMENT AND ECONOMIC GROWTH.

 INVESTMENT AND ECONOMIC GROWTH.

INTRODUCTION

There is a close interconnection, generally in all nations, about economic growth and investment/capital formation. There has been an emphasis by Marxist and Neo-classical that economic growth is stimulated by capital accumulation. Money is used to increase the creation of capital intensive goods. According to Sundrum (1993), when such products are used, there will be an increase in income through which capital accumulation promotes the growth of revenue. The rate at which the Economy grows is mainly determined by the capital. An increase in production rate is directly proportional to the rise in capital stock. Those nations that have invested heavily; they always have a higher GDP growth (World Bank, 1989).

All the economic exercise, which include resources used to produce goods and services, is known as Investment. For less-developed nations, infrastructure will be one of the best Investments for them. The reason being that there will be the usage of recent technology by producers due to support, and when modern technology is introduced to the producers, there will be an increase in production activity. We will have productive and more skilled workers if we invest in training and education, when we invest in agricultural research, it will lead to increase production due to better facilitation dissemination of scientific results. According to Barro (1991), there will be an increase in the value of the cost of raising children and parents’ time when we invest in human capital. The fertility rate decreases due to the rise in the price of raising children, hence increasing saving per person, and this stimulates the per capita growth rate. There has been more persistence by authors in the importance of investment formation to create development.

Importance of Investment in increasing Economic Growth

Investing is when we spend on capital, and this includes building roads, building new factories, introducing new technology, buying new machines.in a simple way, Investment in economic means not putting your money in the bank but instead putting in use. Aggregate demand (AD) is a component of Investment, and that means that there will be an increase in AD and short-run economic growth if the Investment is increased. Both an increase in Investment and AD will improve the commercial rate if there is spare capacity.

More so, when the Economy is at its peak, there will be inflation when the AD keeps increasing, and therefore, there will be no increase in the GDP.

Apart from Investment, we have other factors that affect the AD, and this is, the increase in Investment might not increase AD if there was a decrease in consumer spending or export decrease. The most significant element of AD is not the Investment, but the consumer spending’s which is approximated at 66%.

The Multiplier Effect and the Investment

The multiplier effect can be caused by the rise in Investment when the Economy has spare capacity. The economic growth increases with an increase in initial Investment, this might be reinvested in further Investment if there will more profit and sales gained by the company. More so, households will have more income because of the employment offered to them by the investments, and there if we invest three billion dollars, it might result from an increasing GDP of four billion dollars. (Multiplier effect of 1.5).

The supply side of the Economy and the Investment

The production capacity of the Economy will automatically increase if the Investment is made with the seriousness it deserves. For example, when a nation invests in education and skills, it will lead to an increase in labor productivity, and also new technology investment increases the productive capacity of the Economy and productivity, and this will automatically lead to a shift in long-run aggregate supply (LRAS) to the right. The long term economic growth is caused by an increase in LRAS, and therefore economic growth will rise without inflation. If an increase in Investment causes a rise in productivity, then it can also lead to an increase in the long-run trend rate of economic growth.

The diagram below shows the increase in LRAS and AD.

According to the diagram, there is a higher GDP without inflation with Investment.

Evaluation

It all depends on the kind of Investment the country is doing. Some of the mislaid countries invest in the improvement of industrial size, and this might be inefficient and may not cause an increase in economic productivity. Investment from the overseas and private sectors might be of great importance in increasing productivity because they always have enough knowledge about the key things to invest in.

Furthermore, we have countries with supply constraints in public goods. And this is infrastructure, roads, bridges and many more. Since the free market cannot provide such open products, the government will have to invest in this so that it can help them overcome the supply bottlenecks, we have an example of high traffic on roads, and this has a significant effect in economic activity and business.

For improved productivity and high competitive Economy, then a country should make Investment when a state doesn’t invest, there will be a high level of consumption, and this will create an imbalanced Economy. And in the end, it will lead to little Investment and current account deficit in the future.

How Investment is affected by Economic Growth

Investing in business might sometimes be too risky. If the economic forecast increases, there will be a rise in business investment that will help meet demands in the future. And therefore, a surge in Investment might have caused by the increase in Investment. But if the Economy falls, businesses will fail to invest. The accelerator theory states that there is a dependency on Investment on the economic growth rate. Also, both the level of Investment and economic growth depends on the price of interest, technological progress, and regulation by government and confidence by the business.

I have used the UK investment statistics in 2005-2005

Economic growth

There was a recession in 2008-2009 due to a fall in Investment. And this was caused reduced bank lending and credit crunch.

Factors that Affect Foreign Direct Investment

Buying of capital and investing in other countries is referred to us Foreign Direct investment, we can use an example if Nike would have been built in Pakistan for training by the US, this would have been counted as foreign direct Investment. There are three significant factors that affect direct foreign Investment, and this is communication and transport links, skills, and wage cost of labor, infrastructure, and access to raw materials.

Wages

Countries with lower salaries are mostly used to outsource labor, for example, the average wage in the US is $15 per hour and only $1 in Indian sub-continent, outsourcing production will significantly help reduce the cost, and this is the reason as to why many clothing companies have invested in the Indian sub-continent. Although FDI cannot be determined alone by wages, high tech investment can be attracted by top paying nations. Due to poor infrastructure and transport might lead some firm not to invest in sub-Sahara Africa despite low wages.

Labour skills

We always have companies that want high skilled personnel, an example of the companies are electronic and pharmaceuticals .hence, those countries with top labor skills are productivity, with low wages tend to get Investment from multinationals. And this has given China a lot of advantages, most of them speak English, but have meager wages. Many companies find it an excellent place to outsource and therefore investing there.

Tax rates

Big companies such as Google, Microsoft, and Apple have always invested in the nations with the lowest corporate tax rates; we can see that Google and Microsoft have invested in Ireland because of its flat corporate tax rate, despite them operating in all European nation, they have got a lot of profits from Ireland.

Commodities

The availability of products is one of the critical reasons for Investment, it has been the reason for increase FDI within Africa by Chinese companies.

Exchange rate

A feeble exchange rate will be advantageous to the host nations, and this will attract more FDI because the multinational will use little money to purchase assets.

CONCLUSION

As has been discussed above, economic growth depends entirely on Investment from the country or different countries, and this always leads to the high productivity of the Economy. We have different ways in which a state can invest on its land, it can be either through buying new machines, bringing new technology or even building more massive factories, since Investment is a component of aggregate demand, any increase in Investment is directly proportional to AD, and this will lead to a rise in economic growth rate. We can also see that investing in education and skills also attracts investors, and when multinational invest they bring employment opportunities hence improving the living standards of the people. In addition, we can see that not all that you invest will lead to economic growth, especially increasing the industrial capacity, it can be of no importance, and it will not improve the productivity in the Economy. Encouraging private Investment and overseas might be of great importance since they always invest in things they have enough knowledge about it. We can also see that public goods can also affect Investment, such our poor roads, this might cause high traffic hence slowing down businesses and economic activity. When the Economy grows, it attracts the Economy, and many people will tend to open the market to meet future demands. When there is low economic growth, people will be afraid to invest in the market. We have factors such as wages rate, labour skills, tax rates, transport infrastructure and exchange rate. When the wage rate is meager, most multinational companies will invest in that country. When there’s a guaranty of commodity availability, multinationals will spend, and we can see that most Chinese companies have invested in Africa. The main reason for Investment is for economic growth.

REFERENCES

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