- Investment by firms is influenced by multiple factors in an economy
- Firms will choose to invest if they feel confident that they will make a good return on their investment
- The decision to invest is linked to the business objective of profit maximisation
A Table That Shows Four Key Influences on the Decision by Firms to Invest
Rate of economic growth |
Interest rates |
Demand for exports |
Influence of government & regulations |
- Increasing growth sends a signal that higher output will generate higher profits
- The faster the economic growth, the greater the urgency to invest
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- Most investment by firms is financed through business loans
- Decreasing interest rates encourage investment
- There is a mostly inverse relationship between investment and interest rates
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- If demand for exports increases, firms will likely invest to meet the global demand
- Demand for exports can increase if the exchange rate depreciates
- Goods/services now seem cheaper to foreigners
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- Government intervention can increase investment e.g. subsidies
- Government regulation can decrease investment (it raises costs of production for firms and can lower profits)
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