Savings and Investment

Note that in this instance we are looking at the factors which will affect whether or not business owners will choose to spend their money on new capital assets. The decision of whether or not to invest (ie put your money into the sharemarket, property and so on) will be affected by the very same factors that affect saving.

Once again, we can gain an insight into the factors which will affect investment spending by looking at the five sector model. Businesses will choose to purchase capital assets when they feel confident enough to expand their business. As a result, business confidence is the most significant factor affecting investment spending. The underlying question is obvious – what are the factors which affect business confidence?

There is no doubt that interest rates will play a key role in the decisions made in this regard. When interest rates are low, business owners are far more likely to borrow money in order to expand their firm. As most expansions will require some form of external financing (ie a loan), high interest rates can be the biggest impediment to the generation of new investment spending in the economy.

However, low interest rates alone are not enough to get things started. Business owners will only expand if they believe that they will make a profit on the new venture. This is most likely to happen if existing firms are already making substantial profits. In other words, a strong return on existing investments will lead to an increased willingness to invest in further expansion.

Changes in technology will also have a significant impact on the investment decision. In early 2007 many firms chose to upgrade their computer systems, as this coincided with the introduction of Office 2007 by Microsoft. As many firms required faster processors and larger storage capacity to take full advantage of the new software, this release resulted in a surge in investment spending at that time. (It also resulted in an 88% increase in half yearly profits for Microsoft!)

Finally, the manner in which existing assets are being used will also affect the investment decision. If the existing assets of a business have excess capacity, then there is no need to update them. For example, if a machine is not being used for the entire day, or there are times when a manager can’t find staff to use a particular asset, then it would be foolish to upgrade the system. On the other hand, if a particular asset is being used so extensively that it is in danger of breaking down, then it might be time to supplement that item with a duplicate (or upgrade it to a bigger machine, or a more efficient one).

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