Factors Influencing the Level of Investment

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The decision to invest is not that much different from the decision to invest much or little. Whether domestic or international investment, the decision is based on expected returns as well as how much capital is available. Other factors go beyond this that can determine whether the investor will invest much or little of his financial substance in a project, and these can differ depending on whether the market is domestic or foreign.

Basic Determinants

HSBC lists the basic causes for investment decisions as the amount of surplus liquidity at your disposal, the demand for funds and your own personal evaluation of the risk involved. These can both make the initial decision to invest as well as, depending on the intensity of these variables, the decision to invest more or less in a project. For example, if the past track record of a specific market or investment company is excellent, this might be the main determinant to invest more of your money.

Foreign Investment Decisions

Globalization101.org has a larger set of variables dealing with investment and investment levels listed on its website. These deal primarily with the determinants of foreign investment, but the general structure of the decision is the same. For foreign investments, things such as political stability, the level of market development and the existence of incentives and tax breaks can be the main determinants to invest heavily or lightly in that market.

Domestic and Foreign Investment Levels

Other factors serve to mix both foreign and domestic investment levels. These include the general expectation of the economy's future, interest rates and government regulations. An economy widely touted as about to take off will attract heavy investment, especially if the regulatory regime is considered transparent and predictable. If interest rates are low, it might be time to borrow, which can help you make the decision to invest and perhaps more than you would under higher rates. This, in turn, implies that the stability of the banking sector in general is also an important determinant of investment and investment levels.

State and Banking

Government and political issues are also important. Whether foreign or domestic, the level of the capital gains tax is an important determinant of investment levels, since the lower the rate, the more of the gain from the project you can keep. For foreign investment decisions, if a firm believes the local currency will go up in value, the level of investment may be lower than it might have been, as the higher currency will make exports from that country more expensive.