The economy and investment

Vocabulary

Production purposes- виробничі цілі;

to сontribute – сприяти, робити внесок, співпрацювати;

domestic expenditure – внутрішні витрати;

to enlarge – збільшувати, розширювати;

installed capital – установчий капітал;

production capacity – виробничі можливості, виробничі потужності;

capital accumulation – накопичення капіталу;

appliances – прибори (електричні чи електронні);

utility – корисність;

convention – угода, конвенція, збори;

premises – приміщення, будівля, нерухомість;

storehouse - склад;

endowment – внесок, пожертва, фонд;

interest rate – відсоткова ставка;

benefits – прибуток;

to reduce – скорочувати;

competitiveness – конкурентоспроможність;

profile – графік, структура;

revenues – витрати;

to obtain – отримувати, привласнювати;

extension – розповсюдження, продовження, розширення;

equity – акціонерний капітал, доля в акціонерному капіталі;

fluctuations – коливання;

private equity funds – особисті (приватні) капітали;

remunerative – винагороджуючий, вигідний;

irreversible – незворотній, кінцевий;

uncertainty – невпевненість;

sacrificing – жертвуючи;

triggering – відпускаючи, дозволяючи;

arable – орний;

deteriorated – пошкоджений;

fertilizers – добрива;

fully-diversified – можливість вкладати гроші в різні види підприємницької діяльності (амер.);

to lease – здавати в оренду, брати в оренду.

Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the value of the instrument. It is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance no matter for households, firms, or governments. An investment involves the choice by an individual or an organization such as a pension fund, after some analysis or thought, to place or lend money in a vehicle, instrument or asset, such as property, commodity, stock, bond, financial derivatives (e.g. futures or options), or the foreign asset denominated in foreign currency, that has certain level of risk and provides the possibility of generating returns over a period of time.

Investment comes with the risk of the loss of the principal sum. The investment that has not been thoroughly analyzed can be highly risky with respect to the investment owner because the possibility of losing money is not within the owner's control.

In the case of investment, rather than store the good produced or its money equivalent, the investor chooses to use that good either to create a durable consumer or producer good, or to lend the original saved good to another in exchange for either interest or a share of the profits. In the first case, the individual creates durable consumer goods, hoping the services from the good will make his life better. In the second, the individual becomes an entrepreneur using the resource to produce goods and services for others in the hope of a profitable sale. The third case describes a lender, and the fourth describes an investor in a share of the business. In each case, the consumer obtains a durable asset or investment, and accounts for that asset by recording an equivalent liability. As time passes, and both prices and interest rates change, the value of the asset and liability also change.

The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.

An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it.

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

Investment plays some macroeconomic roles:

• it contributes to current demand of capital goods, thus it increases domestic expenditure;

• it enlarges the production base (installed capital), increasing production capacity;

• it modernizes production processes, improving cost effectiveness;

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

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, etc.). 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:

• inventories stock of finished goods, semi-manufactured goods, and raw materials in commercial premises, storehouses and producers' plants;

• equipment for direct production of services and goods;

• transport and auxiliary machineries;

• office and general endowment for indirect workers and management;

• any long-lasting improvement in those items;

• industrial plants and service buildings;

• other buildings.

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).

At firm level, investment is determined by expected benefits as well as funds, both in term of availability and cost (interest rate).

Benefits relate to the effects of investment in terms of increased value added, reduced costs, larger production, higher competitiveness. Hence, profits are expected to be higher, too. The value over time of these benefits (and profits in particular) are compared to the investment costs.

The temporal profile of costs and revenues will be important in the decision whether to undertake the investment or not.

Funds for investment can be obtained thanks to the following items:

1. Self-financing, in turn due to:

• cumulated past profits;

• injection of new financial capital from the owners;

• amortization, i.e. accountancy allowance for past investment, considered now as current costs but not corresponding to any current expenditure;

• extension of equity by new shareholders, as it happens with relatives sending remittances to home business.

2. Loans from banks and other financial institutions:

• long-term credit at fixed or variable interest rate in domestic or foreing currency;

• short-term credit;

• micro-credit in the case of very small business.

3. Capital market finance, through the emission of obligations as well as through the issue of shares in the stock market (primary market). The following price fluctuations do not directly have any impact on financing the firm. But it is true that further new emissions of shares often require positively-oriented capital markets.

4. Seed money and expansion capital for new firms provided by venture capitalists and private equity funds;

5. Public funds and incentives for investment from international, national, regional, local institutions.

Investment expenditure is a bet on future. If the bet is lost, the product does not find a remunerative market and much of the investment expenditure turns out to be a sunk cost that cannot be recovered. In the extreme case, investment is irreversible. Coupled with true uncertainty, irreversibility becomes a fairly important determinant of investment levels across industries, as this paper points out.

Countries differ a lot in respect to investment levels and dynamics. Some countries have heavily invested, sacrificing current consumption and triggering an export-led growth, often based on manufacturing. Others keep investment at much lower levels with an unsecure growth path.

Agricultural land in Ukraine is one of the best mid and long-term investment opportunities in the world. While many arable land plots worldwide get deteriorated by intensive conventional (chemical) farming practices, Ukraine’s black soils, aka Chernozem, have managed to stay much less harmed by humanity’s most dangerous and delusive “inventions”: toxic pesticides and synthetic chemical fertilizers. Ukraine’s diverse farming climatic zones provide an exceptional opportunity for fully-diversified, complete-cycle farming ventures with their own livestock, seed production and premium field crops and row crops production of export-scale harvest volumes.

Ukraine’s agricultural land cannot be purchased, but lease agreements for agricultural land enable as much freedom for performing farming operations as ownership while also providing a primary right of purchase in case of the agricultural land sale moratorium lift and given that pai holders would be willing to sell off their property.

Within the past three years Ukraine has adopted several important legislative measures which could serve as the foundation for the development of the legal infrastructure necessary to support the transition to a market economy. Nonetheless, a market oriented legal infrastructure is still at an early stage of development in Ukraine. Essential regulatory mechanisms required to support the institutional structures of a market economy in the areas of banking, corporations, securities regulation and property rights must be further developed in order to facilitate capital accumulation and financing techniques - two essential elements for the development of a robust private sector.

Answer the following questions:

1. What macroeconomic roles does investment play?

2. Where do the funds for investing come from?

3. What is investment at the firm level?

4. What effect does the investment have on any firm?

5. What is the problem of risks with investing?

6. Have you got any experience of investing? What level of risk are you prepared to accept?

7. What investment opportunities are there in Ukraine?