Fixed investment

Fixed investment in economics refers to investment in fixed capital, i.e. tangible capital goods (real means of production or residential buildings), or to the replacement of depreciated capital goods. Thus, fixed investment is investment in physical assets such as machinery, land, buildings, installations, vehicles, or technology. Normally, a company balance sheet will state both the amount of expenditure on fixed assets during the quarter or year, and the total value of the stock of fixed assets owned.

Why fixed?

The use of the term "fixed" refers not so much to the asset being invested in "staying in one place", but to the circulation of flows of capital. Normally, for the purpose of accounting, fixed investment refers to physical assets held for one year or more. The investment capital is therefore fixed, in the sense that it is tied up in physical assets for a longer time, and thus cannot be used for other purposes. This contrasts with, for example, investment capital in the form of liquid bank deposits earning interest.

Measurement

The amount of fixed investment may be stated "gross" (before taking into account depreciation) or "net" (after depreciation). By subtracting disposals of fixed assets from additions to fixed assets in an accounting period, we obtain a measure of the net (fixed) capital formation.

In official statistics, attempts are often made to estimate the value of fixed capital assets in a nation, the value of their depreciation (or Consumption of fixed capital) and the value of Gross fixed capital formation by sector and type of asset. Fixed assets depreciate in value over time, due to wear and tear and market obsolescence. At the end of their useful lifetime (perhaps 7-10 years), they possess only a scrap-value.

For statistical purposes, investment in fixed capital must be distinguished from investment in intermediate goods. Unlike fixed assets, intermediate goods (for example, commodities like oil, electricity and grain) are completely used up in production (usually within a year).

Trends

The broad historical trends are:

*fixed assets are replaced in a shorter and shorter time. Thus, for example, a type of machinery which in the 19th century might have a useful lifetime of 20 years is today scrapped after 10 years.

*Many fixed assets have become cheaper to acquire, due to more efficient production methods. Thus, the same amount of capital can nowadays often buy a larger stock of fixed assets.

*The average turnover time of fixed capital (the time it takes for its value to be recovered from sales) is decreasing. In part, this is due to the ability of businesses to write off their fixed assets for tax purposes at a quicker rate (the true depreciation rate and the legally permitted depreciation rate often diverge).

*Fixed investments nowadays can be enormously large (for example, a nuclear power plant might be built for three billion dollars). This creates more risk and means that many financial guarantees and insurance arrangements become necessary. Likewise, investing decision making in these cases becomes highly sophisticated, involving such techniques as game theory, decision theory, financial modeling, etc.

*In the last two decades, the total amount of annual fixed investment in OECD countries has tended to stagnate or grow more slowly in real terms—the main growth areas have been investment in computers and the construction of buildings. Thus, an increasing portion of total capital is tied up not in physical capital goods, but in financial obligations. This trend is closely related to perceptions of investment risk and relative profitability, in a situation of sluggish growth in ordinary consumer demand. Globally, that means the growth in physical wealth is increasing at a slower rate, though nations with a superior trading position can of course amass more physical wealth, through importing.

*The value of the housing stock and real estate generally has tended to grow much faster since the mid-1980s, suggesting to many commentators that it is "over-valued". The most likely reason is cheap credit making the acquisition of real estate easier, and thus strongly stimulating market demand for properties.

*In the developed capitalist countries, the total stock of fixed capital tied up in residential buildings is nowadays larger than the total stock of fixed capital tied up in industries.

ee also

*Capex
*Capital accumulation
*Capital formation
*Consumption of fixed capital
*Depreciation
*Fixed capital
*Gross fixed capital formation
* Opex
*Opportunity cost
*Sunk cost


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