Key determinants of investment include the expected return on investment, general expectations about the future, business confidence, changes in national income and corporate tax as well as interest rates and levels of savings, according to Economics Online. Investment spending helps perpetuate the circular flow of income by injecting new funds.
Firms invest for two main reasons. Capital consumption investment is undertaken to replace depreciated fixed capital assets, while investment in new buildings, machinery or equipment is used to increase production, decrease long-term costs, increase competitiveness and increase profit margins, reports Economics Online. A small, positive change in national household income and spending can trigger a proportionally larger investment response from firms, as long-term expectations change for the better. This is known as the accelerator effect.