# investment

An investment ( Latin investire , "to clothe") is generally understood in the economy to mean the use of capital for a specific purpose by an investor .

## General

The term is an object of knowledge both in business administration and in economics . While entrepreneurial investment decisions are in the foreground in business administration , economics examines the aggregated investment behavior of all economic subjects . The term capital investment is more common for investments by private households in the context of private financial planning .

With the biological investment is meant the commitment of the parents to ensure the survival of the offspring , especially at the expense of the competition for other partners.

The business economist Günter Wöhe differentiates between tangible, financial and intangible investments according to the type of assets for which financial resources are used. In a broader sense, this includes short-term investments as well as investments in securities (financial investments). More narrowly and most commonly, the term is used for long-term property, plant and equipment . It can be viewed as long-term if the means of production outlasts the current financial year . Investments cover a wide range: from real estate to business vehicles and machines to operating and office equipment . They can be made by public as well as private companies .

Investments are reflected on the assets side of the balance sheet ( property , plant and equipment , financial assets and intangible assets ), their financing can be found accordingly on the liabilities side ( equity and debt ).

### Classification

Fundamentally, investments are differentiated according to the objects of the investment. In addition, this broad breakdown can also be used to differentiate between start-up, net, gross and expansion investments:

by subject
according to purpose
by function
according to interdependence
according to risk

### Assessment of rationalization and expansion investments

In order to determine the success of a planned or implemented rationalization or expansion investment, the effects that the investment has on operational processes must first be recorded. The basis for this is a comparison of the new or future business process model with the previous one . With the help of the following scheme ( change matrix ), the expected or actual effects can be systematically recorded at any level:

Legend:

Examples of investment effects:

(x means: intersection of row and column )

Input factors:

• Input factor 1 × quantity : A smaller amount of input factor 1 is required because the new production process results in less waste .
• Input factor 2 × time : The processing time due to input factor 2 (= machine) is shortened because the new machine is clocked higher.
• Input factor 3 × space : Less floor space is required for storing input factor 3, as a high rack is used in the new process .
• Input factor 4 × quality : Input factor 4 requires a lower quality because the new production process is more efficient .

Output factors:

• Output factor 1 × time : For the creation of output factor 1, the throughput time is reduced , as fewer and shorter idle times arise.
• Output factor 2 × quality : The quality of output factor 2 increases because the new production process is more “gentle” with the raw materials used .
• Output factor 3 × space : The route for delivering output factor 3 is shortened as production is relocated to the country with the highest demand.
• Output factor 4 × quantity : The amount of output factor 4 (= noise ) is reduced because the new production process is quieter.

After the investment effects have been recorded, these must be “monetized”, possibly using auxiliary assumptions. H. be provided with monetary equivalents . Only then can they be included in the investment calculation.

### Decision problems

Investments are considered to be tricky central decisions in operational business, as they often have long-term strategic importance. These result from the capital intensity , the long-term capital commitment and thus the difficult reversibility of investments. Another problem is the time it takes for an investment to be realized (called time lag) and the information situation (mostly about the future), which leads to uncertainties.

In order to make statements about the investment situation of a company, there are some business indicators . These include the plant intensity , stock intensity and investment rate .

The investment decision is further complicated by the fact that in addition to the purely economic criteria (e.g. useful life , capital expenditure and profitability ), which are summarized in the investment calculation and prepared as a decision recommendation, other aspects ( laws , technical feasibility, interdependencies with other areas) are often a Role-play. A new approach to determining the profitability of an investment is the real option analysis , with which an investment can be determined using the means of option price theory .

The key figure of the marginal efficiency of capital forms the actual basis of investment decisions. As marginal efficiency of capital refers to those interest rate at which the cost of the investment with the present value matches the investment (= present value of the net proceeds of the investment). The company will only invest when the marginal capacity of capital exceeds the current market rate. If an investment generates a higher return than an alternative financial investment, it is invested and vice versa. With the expected service life of a machine to be purchased of 2 years, the following formula results:

${\ displaystyle AK = Q_ {1} + {\ frac {Q_ {2}} {1 + R}}}$

Here are the acquisition costs of the investment Net income of the investment in the first year Net income of the investment in the second year Marginal performance of the capital (return on investment)
${\ displaystyle AK}$
${\ displaystyle Q_ {1}}$
${\ displaystyle Q_ {2}}$
${\ displaystyle R}$

For example, if a machine costs 1,000 euros with a two-year service life and the entrepreneur expects 500 euros in the first year and 540 euros in the second year net income from the machine, the result is a marginal performance of 8%. If the market interest rate is 7%, investments are made; if it is above 8%, the investment is not made. This marginal capacity was first introduced by John Maynard Keynes in February 1936 in his General Theory of Employment, Interest and Money .

## Economics

From a complementary economic point of view, the term describes the use of funds for the procurement of physical capital on a long-term basis for the purpose of producing goods . The physical capital obtained serves to maintain, improve or expand the production equipment of companies and maintain or increase the capital stock of an economy in the long term . Key factors influencing the size of the investment are the market interest rate (marginal performance of the capital employed), current income and current production, as well as future expectations of investors. Investments are, for example, the construction of company buildings , the acquisition of technical equipment , machines or tools . In contrast, investments do not include durable consumer goods , military goods or the acquisition of knowledge. Investments are financed from depreciation equivalent values . Only when the investments are greater than the depreciation does an increase in the capital stock occur.

Since the introduction of the ESA 2010, expenditures for military weapons systems , which fall under the general definition of assets, have not been allocated to intermediate consumption , as was previously the case , but to gross fixed capital formation . H. the capital expenditure .

### Modeling

In the simple model of demand for goods , investment is viewed as an exogenous variable . However, this is problematic as the level of investment reacts to changes in production and is dependent on the interest rate. Investment is expressed in the model of demand for goods for a closed economy with government as

${\ displaystyle I = ZCG}$.

In an open economy, the definition is

${\ displaystyle I = ZCG-X + IM}$.

Z is the total demand for goods, C is private consumption , G is government spending excluding government investment. X denotes the export and IM the import .

### Types of investments

With regard to investments, a distinction must be made between the following terms:

• Gross investments describe the total investments in a period.
• Reinvestment (also called replacement investment ) is a part of the gross investment that is used to maintain the production apparatus. Reinvestments should replace or correspond to depreciation. If these two quantities are the same, the value of the means of production remains unchanged.
• Net investment is the difference between gross investment and reinvestment. They serve to improve or expand the inventory of means of production and thus support the growth of the economy. They increase the real capital of an economy and require the (macroeconomic) granting of investment loans .
• Fixed investments are the means of production intended for long-term use.
• Inventory investment (including inventory investment called) comprise physical changes in the raw materials , materials and supplies and the merchandise ( commodities ). They are unplanned investments out of balance .
• Direct investment describes cross-border investments and is classified as a form of capital export .
• Environmental protection investments are long-term investments and serve to build up more ecologically compatible productions.

A distinction can also be made between public and private investments. It is important here whether the investment comes from a government agency or a majority privately owned company.

### Investment-based effects

#### Capacity effect

Capacity effects are the result of the enlargement or improvement of the production possibilities in the economy caused by net investments. This means that more or better goods can be produced through investment. Positive net investments thus increase the overall economic production potential.

#### Income effect

In macroeconomics, the income effect describes the effect of investments on demand and thus on national income . The chains of effects that can be found in theory say that increasing capital expenditure by companies for company expansions or new production processes leads to an increasing demand for goods . This also increases production and creates new jobs that generate higher incomes (primary effect). Higher income in turn leads to an increase in consumption, which triggers further income effects in the economy (secondary effect) and allows this cycle to start all over again. An increase in national income also means that saving increases.

#### Multiplier effect

The multiplier effect of investments describes how much the income of an economy increases if the investments increase by a certain value. For example, if an investment of € 50 million creates an increase of € 100 million in national income in an adjustment process, the multiplier effect is 2.0. An economic adjustment process describes the change of variables in changing framework conditions with the aim of restoring the economic equilibrium. This does not happen automatically and therefore usually over several periods.

### The investment equation

The investment equation analyzes how various influencing variables affect the level of investment. The focus of interest is the negative relationship between investments and interest. If interest rates fall, investments increase. If interest rates are raised, investment activity falls. In an economy, therefore, monetary policy in particular can influence the level of interest rates and thus investment spending.

Another influencing factor is the gross domestic product (GDP). If it rises, so do investments and savings . This means that more is invested at a certain interest rate than before. The Keynesian investment equation states that after a period

${\ displaystyle I = S}$

have to be. This equation is derived from the Keynes cycle model ( simplified cycle model ). The investment equation also analyzes the relationship between consumption and investment. Rising consumer demand also leads to higher investments.

### The equality of investment and savings

For a closed as well as an open economy, the net investment must be just as large as the savings, since the savings correspond to the unused part of the income and thus the unused part of the production (net investment).

The amount of savings is determined by the investment.

There is no agreement between these two quantities from the outset. In retrospect, the consequences are forced investments or savings.

### The relationship between investment, growth and the economy

Investment activity is the link between the economy and growth . Since investments are part of demand , increasing them leads to high growth rates for the economy as a whole.

The economic development is closely linked to the willingness to invest. Economic phases of downturn are accompanied by reduced investment, phases of upswing and boom are usually associated with high investment activity. Investments thus stimulate the economy and are a prerequisite for steady economic growth and job creation.

### Investment and State

Since investment activity reacts very strongly to the economic situation, the question often arises whether state investment control and promotion would make sense. Investment subsidies in the sense of government grants or the Investment Allowance Act are common practice.

also:

such as:

## literature

• Hans Hirth: Fundamentals of financing and investment. 3rd edition., Oldenbourg Verlag, Munich 2012, ISBN 978-3-486-70211-8 .
• Bernd Müller-Hedrich, u. a .: Investment management. 10th edition. expert Verlag, Renningen, ISBN 3-8169-2558-8 .
• Gerd Schulte: Investment. 2nd Edition. Oldenbourg Verlag, Munich 2007, ISBN 978-3-486-58263-5 .
• Volker Oppitz, Volker Nollau: Pocket book economic calculation . Carl Hanser, Munich 2003, ISBN 3-446-22463-7 .
• Jörg Hinze and Kai Kirchesch: The connection between profits and investments is loosened . In: Wirtschaftsdienst , 79th year (1999), no. 11, pp. 677-682 Download (PDF) .
• Wilhelm Schmeisser, Dieter Krimphove, Horst Zündorf: Financing and investment. 1st edition. UTB, Stuttgart 2012, ISBN 978-3-8252-3672-4 .

Economic perspective

Wiktionary: Investment  - explanations of meanings, word origins, synonyms, translations

## Individual evidence

1. ^ Günter Wöhe: Introduction to general business administration . 2013, p. 474
2. ^ Bernhard Felderer, Stefan Homburg: Macroeconomics and new macroeconomics . 1989, p. 110 f.
3. John Maynard Keynes: General Theory of Employment, Interest and Money . 1936, p. 115
4. European System of National Accounts - ESA 2010 . ( Memento of the original from July 7, 2014 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF; 7.5 MB) Publications Office of the European Union
5. a b Blanchard, Illing: Macroeconomics . 3. Edition. Pearson studies, Munich 2004.
6. ↑ So as not to restrict the granting of credit to the economy . ( Memento of the original from February 3, 2013 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF) Deutsche Bundesbank, pp. 188–189; Retrieved December 21, 2012.
7. Commercial banks create money by lending . ( Memento of the original from February 3, 2013 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF) Deutsche Bundesbank, p. 72; Retrieved December 21, 2012.
8. … do not finance planned investments due to lack of bank credit . ( Memento of the original from February 3, 2013 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF) Deutsche Bundesbank, p. 101; Retrieved December 21, 2012
9. a b c investment . In: Pollert, Kirchner, Polzin: The Encyclopedia of Economics - Basic knowledge from A-Z . 2nd Edition. bpb, Bonn 2004
10. a b investment . In: Buscher: Economy today . bpb, Bonn 2006.