Firm Investments and Economic Freedom
When you say Firm Investment, what do you mean? It is not the same as Savings and Investment. It is a model of investing which focuses on firm assets like investments in fixed income securities and equities. Firm Investment is mainly dependent on capital gains, with a little bit on interest and dividends. It is usually thought of as a conservative type of investment.
Some firms that fit the Firm Investment model are insurance companies, law firms, banks, pension funds, and public utilities. The main idea of this concept is that firms should be able to absorb external costs of operations to retain their competitive advantage. Firms should retain their ability to reinvest profits into their firm and expand their enterprise so that they can realize the full benefit of capital gains. The goal of external finance is to ensure long-term sustainable capital gains and low volatility in fixed income markets. The elasticity of capital markets is one of the key factors in the determination of the level of economic freedom.
Many firms argue that Firm investment decisions are made on the basis of economics and therefore cannot be influenced by other factors. However, many think that firms do have some control over external factors and can use them to their advantage. Two key examples are internal funds and leverage. Internal funds are a part of the profits of a firm and are often used for expansion and acquisitions.
Leverage occurs when a firm owns a large amount of debt. For example, a bank may buy 100 shares of stock at a cost of one million dollars. If that company does not grow and its value drops to only eighty thousand dollars, the banks will still be able to gain ten million dollars from the investment. Many think that the largest firms have large amounts of human capital but research suggests that firms vary greatly in the quality of their human capital. Human capital may account for as much as thirty percent of firm investments.
In developing country, firms often have to use local resources to obtain foreign-based labor. A firm’s decision to use local labor is an important element in their overall investment decisions. In addition, access to capital may be a major constraint because many developing country countries lack proper infrastructure and so firms must use finance resources such as loans and capital advances from abroad.
When it comes to investment in human capital and external finance, there is considerable debate. Some claim that firms should focus more on using their own internal resources and less on external finance to remain competitive. Others argue that firms that do not use local economic freedom are not providing the kind of economic freedom that people are demanding and that the result will be less competitive firms in the long run.