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Why do Firms Invest?

 

A positive level of net investment implies a rise in the firm's capital stock and long run expansion in the size of a business.

 

The reasons for undertaking an investment project are varied. Here are five main reasons.

 

        To take advantage of higher expected profits from expanding output and meeting a rise in consumer demand

 

        To generate a rise in productive capacity

 

        To improve efficiency through technological progress and innovation

 

        To exploit economies of scale and thereby bring down long-run average total cost

 

        As a barrier to entry - extra capacity can force out potential competitors in a market, protect the monopoly power of existing firms and thereby increase supernormal profits in the long run

 

 

The UK economy sets to benefit from a higher level of fixed capital investment. It should promote long run economic growth and boost the international competitiveness of domestic producer in home and overseas markets.

 

 

E-mail Steve Margetts