Investment Composition

Although capital accumulation takes place in many institutional sectors of the economy (firms, households, public sector,…), a narrower definition is used in national accountancy.

Investment is just new capital accumulation in business (both private and state-owned).

Household by convention do not invest, even if it does exist a capital accumulation in cars, computers, electric appliances, etc. Public expenditure is partly devoted to roads, railways, infrastructure, buildings (as for schools, hospitals,…).

All this is clearly capital accumulation whose utility will last over time. Still, it is quite a common practice for investment in public sector being considered zero by convention.

Investment is classified according to the degree of directness with which it is linked to current and future sales:

1. inventories stock of finished goods, semi-manufactured goods, and raw materials in commercial premises, storehouses and producers' plants;
2. equipment for direct production of services and goods;
3. transport and auxiliary machineries;
4. office and general endowment for indirect workers and management;
5. any long-lasting improvement in those items;
6. industrial plants and service buildings;
7. other buildings.

In today's world, investment in immaterial assets is getting more and more important, as with the case of expenditure in Research & Development, human capital, software and other areas.

Financial investments in shares, obligations and other financial instruments are not considered as "investment" in a macroeconomic sense nor in national accountancy. The same is true for real estate exchanges of used buildings (both residential and non-residential).

When considering the issue of the creation and diffusion of innovation through investment, a crucial distinction should be made between complementary investments and competitive investments.

Value Of Investments

Investment is the value of machinery, plants, and buildings that are bought by firms for production purposes.

Investment plays six macroeconomic roles:

1. it contributes to current demand of capital goods, thus it increases domestic expenditure.
2. it enlarges the production base (installed capital), increasing production capacity.
3. it modernizes production processes, improving cost effectiveness.

4. it reduces the labour needs per unit of output, thus potentially producing higher productivity and lower employment.

5. it allows for the production of new and improved products, increasing value added in production.

6. it incorporates international world-class innovations and quality standards, briging the gap with more advanced countries and helping exports and an active participation to international trade.