Financial investment and economic investment are related but distinct concepts. At a high level, financial investment involves putting money into financial assets like stocks, bonds, or real estate with the goal of generating returns. Economic investment refers more broadly to investments that expand an economy’s productive capacity, like building a factory or infrastructure project.
While there can be overlap, the key difference lies in the purpose and impact of the investment. Financial investments aim to generate financial returns for the investors, while economic investments aim to grow an economy by funding projects and assets that support broader economic productivity and job creation.
Understanding the nuances between these investment types is important for investors exploring options and policymakers looking to encourage productive investment.
Financial investment targets financial returns
The core goal of financial investment is to generate financial returns for the investor by putting money into assets like stocks, bonds, mutual funds, real estate, etc. The investor provides capital to fund and gain part ownership of companies or projects, with the expectation of profiting through mechanisms like price appreciation dividends, interest payments or rents.
Success is measured by metrics like investment returns, income generated, and capital gains. Risk tolerance and time horizon play major roles in constructing financial investment portfolios suited to an investor’s goals.
Economic investment grows production capacity
Economic investment refers to money put towards assets that expand an economy’s productive capacity over the long run – things like factories, equipment, infrastructure, education and workforce training.
While returns matter, the emphasis lies in the ability to boost output and productivity to drive broader economic growth and development. Success is measured in metrics like GDP growth, job creation, productivity gains, and improved standards of living.
Governments often encourage or direct economic investments towards areas that create spillover benefits but may be undersupplied by private financial investors alone.
They follow different decision rules
The decision rules guiding financial and economic investments differ significantly:
– Financial investors allocate capital towards assets that maximize risk-adjusted returns to meet private objectives. Factors like projected profits, cash flows, and asset price dynamics are paramount.
– Economic investors follow a more complex calculus weighing returns against the asset’s potential to lift productivity, wages, and living standards. Things like job creation potential, technology spillovers, and impact on trade competitiveness enter the frame.
As the objectives differ, so do the tools and frameworks guiding each investment process.
Significant overlap exists in practice
While useful to distinguish conceptually, the boundaries between financial and economic investment blur in practice. Many investments take on characteristics of both:
– Infrastructure projects require significant private financial investment to deliver the economic benefits of connecting markets and reducing transportation costs.
– Manufacturing investments boost productivity and jobs directly while generating financial returns enabling further investment.
– Human capital investments in workforce education fuel personal wage gains and financial returns while expanding economic potential.
Strong two-way feedbacks exist between financial market health and economic growth prospects. As such, the relationship between financial and economic investment is mutually reinforcing over time, even if their core objectives differ upfront.
In summary, while related in practice financial and economic investments follow distinct decision rules and target different primary outcomes. Financial investment seeks to maximize financial returns within acceptable risk levels, while economic investment prioritizes building productive capacity to drive broader growth. Though distinct, healthy two-way interactions between financial and economic investment underpin robust economies.