Factors affecting investment Q8

Increase in National Income in direct term has positive impact on growth of wealth. Investing into a growing economy is thus benefiting from the wealth generation of the country. It is positive investment. On the other hand, if the economy is at stalemate, national income is shrinking or stagnate. Hence, investment into such economy will likely suffer a setback, as people cannot consume or even if they consume, they cannot pay back loans. For example, car could be sold but repayment of car loan is poor. Non-performing loan will increase. An investment with bad repayment is a losing investment.

b) Loan interest rate

Loan interest rate determines the interest calculation of the credits like car loan, house mortgages and other short term loans. A car loan of RM100k at 4% means repayment interest of a year would be RM100,000 x 4% = RM4k. This is cost to an investment - if the investment were to buy a car to run its activities. The higher the loan interest rate the higher is the cost of running the investment activities.

Thus, loan interest rate will diminish the earning of the investment. The profit earned from the investment activity would have to pay all the cost of running the business, which includes this interest cost. In short, loan interest rate will negatively affect investment outcome.

c) Technological advances

Technological advances are like machinery with better efficiency to run businesses. Take for example, automation of factory operations. It increases productivity and attain economics of scale. Therefore, advances in technology will increase output, or improve cost saving. The cost of running business will reduce in the long term.

Take for example, technology innovation in car manufacturing. The more efficient manner of production of vehicles will reduce manual cost. It will result in better profit, and better investment outcome. However, technology does not come without cost. Its initial Research and Development (R&D) cost is enormous, and implementation of technology is also without hiccups. All that cost can initially take a toll on investment outcome, and is a pitfall for many failed investment as well.

d) The stability of the national currency

National currency (RM) plays an important part as a medium of exchange in trades. Especially in international trade, currency stability is a key factor in attracting foreign investment into the country.

A stable currency enable trade to be conducted with calculated risks. The profit from an investment would be estimated with certainty. For example, the assembly of car could make a profit when a plant is set up in Malaysia. This is estimated with the cost of production, cost of marketing and selling assembled vehicles here. All this is estimated with a certain range of exchange for currency. If the exchange rate is now unfavourable, ie it becomes more costly to import parts into the country as the currency weakens, the cost of car becomes expensive. Therefore, the profit will be eroded when the car is assembled and sold in Malaysia. Such investment will be less favourable when the exchange rate fluatuates to a weaker RM.

Of course, if the investment is measured by just an international currency, USD, then as the RM weakens, the profit of investment improves. This is because the wages, local raw material costs are all in local currency whereas the produce is sold in USD. In other words, giving a similar cost but a bigger profit. An example of such investment is Palm Oil. Palm oil is traded in USD. When RM is weak, the palm oil is still sold in USD (being the currency it is traded internationally). The cost of employing the workforce, and the fertilizers come down with weaker RM, enabling the profit to be higher.

e) Political and social stability

Political and social stability would definitely foster investment outcome. An investment would usually need long term stability to carry out its growth activities. Crops would need time to grow and mature. Human assets like skilled labour would need time for training. Everything is time based.

Stability will allow this elements of an investment to mature. The eventual consumption of this investment activity would also require time and money. A growing economy would only be possible if people are living in peace and stability. Things can be planned and carried out.

War, unrest and street demonstrations will only cause destruction to businesses. It also takes away productivity time from the work force. It causes disruption to education, health care and commerce. In such unrest, there is no certainty the business partners will still be around tomorrow if they are in a war torn country. Thus, political and social stability is very important for investment.

Ref:
Own account.