In the article we will understand what a pure investment is. This concept is often used in economic news and articles, and is presented as one of the most important indicators. Why did this type of investment deserve such attention? How do gross and net investments relate to each other? How to calculate their value? Let's go in order.
Why invest?
Why spend money on developing a country's economy or a single business? Of course, in order to increase power and earn even more money. Of course, it is possible to achieve the same goal without serious costs if we intensify production, but the effect will be temporary.
In addition, material wealth has a tendency to wear out and obsolescence; therefore, without constant development and renewal it is impossible to even maintain a constant level of production, not to mention building it up.
What types of investments exist
Distinguish between gross and net investment. Gross investment is the total amount of funds that is allocated both for the reimbursement of fixed capital and for its buildup.
For example, having bought a machine, an enterprise begins to write off its value gradually, making depreciation charges (restoration investments). This is done so that by the time the replacement of worn-out equipment is required, the enterprise has money for it. This also includes repair costs. But all this is only the restoration of current capital.
But what if two machines are needed? Then, amortization alone cannot be dispensed with. Additional funds are needed to create new capital (purchase of modern equipment, construction of buildings, etc.).
Net investments are investments due to which there is an expansion of production and growth of its volumes. They directly affect capital growth.
The growth of net investment stimulates the rapid growth of income, and the latter increase faster than the rate of investment. Such a pleasant phenomenon is called the effect of the multiplier.
Net investment formula
The value of net investment is the difference between gross investment and depreciation for a certain economic period.
This indicator reflects the nature of the economic development of the enterprise. If the value is positive, then the potential of the business entity is used to its full potential and there is an increase in production. If it is negative, this indicates a decrease in output.
If the net investment is equal to the amount of depreciation, this indicates that no changes in the direction of growth or fall over the period under review have occurred. For better or worse, it depends on a number of other conditions and indicators. In one situation, a zero result can be called stability, in another - stagnation.
The right amount of investment is just as important as their availability. If there are too many, inflation spins. Lack of volume leads to deflation and stagnation.
What determines the amount of investment
It is not always possible to direct part of the profit to the development of production. Sometimes there is no free money at all, and you have to look for investors. Therefore, the size of net investment depends on various macro- and microeconomic factors. For example:
- Stability of the economic and political system of the country. The less stability, the less investor willingness to risk money.
- Inflation rate.If prices rise very quickly, then the real return on investment will be less than the nominal.
- The level of technical development.
- Taxation.
- Expected return on investment. No one will expand and modernize production for no reason. The result should be profitable. For example, if the company's products are not in demand on the market, then it makes no sense to release them in increased quantities.
Sources of Net Investment
As is clear from the above, net investment is an additional and rather risky cost. Where to find funds for them? There are many options.
- Lending. This method is good in stable economic conditions, when the company is solvent, and a bank loan is issued at an acceptable percentage. Investing using this source is advisable only if the expected rate of return exceeds the interest rate.
- Issue of shares. Money received from the sale of shares goes to invest. But this method is not available to all enterprises.
- Investors own funds. If the owners of the company see good development prospects, they can direct their free funds to expand production. This will not only pay off, but also bring additional profit.
- Attracting investors, including abroad. An investor is a legal entity or an individual who is ready to direct its funds to the development of the enterprise in return for the fact that the company will share with it the profit that it will receive as a result of new investments. Foreign investment is an option for large companies that successfully operate in the international market.
Thus, net investment is a source of growth and development of production, which means prosperity of the economy and the welfare of society.
