Economics Essay – Investment

Explain the factors that a large multinational company would likely to take in to account when deciding whether or not to invest in a new factory in the United Kingdom.

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Investment is the creation of capital every company needs to take into account certain factors before they decide whether or not to invest in some property, a large multinational company would probably have to think of more, as it has international factors to think about.

There are different types of investment private (this is what the large multinational company would be,) and public, this is where the state invests usually in social capital. There is also autonomous investment and induced investment. Autonomous investment is where revenue has not changed but the rate of investment does. Induced investment is where a change in revenue results in a change in the rate of investment. Private investment is involved with both induced and autonomous.

Inward investment in the UK form a large multinational company is good for the UK it creates physical capital and new jobs which is good for economy multipliers. An advantage to the company if they are outside the EU is that they avoid tariffs and quotas placed on these goods.

The company would have to think about the return they will get in the UK, is it cheap to set up here, will production costs be too high to gain profit, is there product price elastic will consumers buy their product if there are competitors with much cheaper products. If the cost of producing the product is high then supply will have to decrease, this is not good for a multinational company they could just invest elsewhere.

The company could do a cost benefit analysis, this enables them to find out all of the positive and negative internalities and externalities there business will have all in terms of value for money, this will then tell them if it is worth setting up.

Interest rates, inflation and mood in the UK has a lot to do with the decision high interest rates means borrowing money means you have to pay a lot back, entrepreneurs do not like uncertainty and inflation causes uncertainty. Mood and expectation in the UK has huge effects on the economy so will affect the investment significantly. If people are suspicious of a raise in interest rates then they will not invest their money they will put it in the bank, this negative thinking stops consumption and pushes up inflation and interest rates anyway, positive thinking does the same thing, people think positive consume more which makes more jobs and money meaning great multipliers these multipliers are linked to accelerators (these are when a small changes in income has a huge affect on investment.

There only has to be a small change in income to affect the rate of investment so when income in still rising but at a slower rate investment drops dramatically causing downward multipliers and accelerators.

Discuss whether the government should actively encourage such investment by offering grants and tax relief to subsidise the investment.

I think the government should encourage such investment because the inward investment from other countries creates new jobs, higher consumption resulting in high aggregate demand, which is great for the whole economy.

If the government give out grants and tax relief to encourage people to invest then they will lose a lot of money, tax is the governments money if it doesn’t come in public investment will have to decrease anyway, so it would seem more private investment crowds out public investment and if the government do not give out tax relief and subsidies then public investment will crowd out private investment. These grants and tax relief will only encourage the induced investment because the revenue/income coming in will be higher. Autonomous investment will not necessarily be affected.

If the governments PSBR rises, interest rates will rise so that they can get money back, people are more willing to lend yet people are probably less likely to borrow especially investors. It’s kind of a lose, lose situation you have got to have a PSBR to get private investment but public investment crowds out private investment.

It is a good idea for governments to encourage entrepreneurs to invest as it is part of aggregate demand, so is government spending if these both rise it will increase AD. Consumption + investment + government spending + exports – imports = AD

Borrowing a lot of money can cause a recession, in a boom tax revenue pours in because income rises to more income tax goes to the government and demand rises so more VAT goes in too. In a boom the government can pay back its PSBR in a recession it borrows. If the government our giving out tax relief and subsidising investment then the economy is more likely to go into a recession.

Investment pushes out the productivity curve. Even if the government do encourage entrepreneurs to invest with the means of tax relief, would it work? Is the question mood has a lot to do with it, it is irrational, volatile and contagious, if people think negatively the economy will do badly and if it thinks positively it will do great. Tax is not usually a huge problem for investors its interest rates and inflation, certainty is needed, with the government spending so high this certainty will decreases anyway so entrepreneurs still might not invest even with the encouragement.

The governments encouragement could work well in the way of an accelerator this is that a small change in income will make a huge change in investment, this could happen tax relief mean income for entrepreneurs will rise investment will boom making accelerators and multipliers resulting in a accelerator multiplier interaction.

Investment is generally a good thing it improves AD and AS and should be encouraged but not by government spending, if it must then let them borrow the money.