Factors Afecting Investment in Public Sector

December 22, 2014 December 22, 2014

Investment in public sector is induced by objectives like defence of the country, economic development and social welfare. Investment in this sector is independent of income or profit motive. Investment must be made, if deemed necessary for the defence of the country or the welfare of the people irrespective of any profit or income.

Deficiency of private investment also calls for public investment. However, it should not be construed that government does not undertake any public investment for profit motive. Under normal conditions, many a time, government also makes investment to earn profit. But the purpose is not to compete out private sector. There are several industries of public interest wherein private sector does not want to invest. Government makes investment in these sectors. For example, in India, construction of roads and running of air, traffic etc. are done largely by government itself. Often government makes investment even at a loss. Volume of this kind of investment increases mostly during war or depression.

The major factors are discussed below:

Technological Advance and Innovation

The technological challenges influence the investment decisions. The investment in labour saving and capital saving machines and other facilities are an example. In other words, a rapid rate of innovation is conducive to high level of investment.

Discovery of resources

Discovery of new natural resources such as metals, minerals and oil induce investment.

Government Policy

The monetary and fiscal policies of the government affect investment mainly in three ways:
- Firstly, when the government pursues expansionary (cheap money) policy, the investment increases because of easy availability of the credit. Reverse happens when the government pursues tight policy.
- Secondly, taxation, which is a part of business cost, affects investment. Higher taxes reduce the expectations of the profit and lower the investments. Reverse happens in lower taxations.
- Thirdly, the government expenditure also affects investment in a big way. When the government initiates new projects and spends huge funds on them, the investment increases.

Foreign Trade

When there is a possibility of increase in a country’s foreign trade, it will have a favourable effect on investment, i.e., more investment will take place.

Political Environment

Peaceful and stable political environment favour investments.

Business Expectations

Business investments are very much dependent on expected profit, so favourable business expectations induce investment.

Rate of Population Growth

More and more population will need more new houses, schools, public services, roads, motor vehicles and consumer goods, so investment will increase. Rapid population growth also increases supply of labour which results in fall in wages, further increasing profit expectations and investments.

Price Levels

When there is a tendency for the price level to rise, it will increase the possibility of the profits of investors and so they will go on for more investment.