Domestic and Foreign Direct Investment

We can all agree that investment is a good thing. Or can we? It is certainly true that exhaustive testing by Levine and Renelt (1992) showed that no other variable had such a close association with economic growth. Many commentators equate more investment with good economics. For them investment is the forgoing of present consumption in order to create an asset that will generate an expected future return. An important part of this definition is ‘create’. Economists use the term ‘investment’ much more specifically than is commonly understood. Investment to an economist does not mean the buying of shares or other assets. This is more properly referred to as ‘portfolio investment’ and represents the transfer of ownership, or part ownership, of existing assets. Investment in this sense is not discussed here. Investment necessarily requires a reduction in resources available for current consumption, and the creation of productive assets to (hopefully) generate higher consumption in the future. So investment proper is all about being virtuous, reducing current consumption to create something for the future, about thinking long term and contributing to sustainable economic growth.