Facets of Investment (Part 3 of 3)

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What’s in a name? The many facets of investment Part III

The system of national accounts, which is compiled by the Department of Statistics, includes a category for gross fixed capital formation. This category covers accumulation of fixed assets by companies, households and the government, and is most closely akin to the layman’s understanding of investment. When a company or the government accumulates fixed assets, it generally means an improvement in productive capacity. For example computing equipment, factories, assembly line machines, all fall under this category.

Money, Money & More Money

 

While on the whole fixed asset accumulation does indeed improve long term growth, there’s lots of things counted as fixed assets that might not meet the “smell” test of improving productive capacity. For instance, buying company cars, artwork for decorating corporate headquarters, and renovating the CEO’s office all count as an increase in fixed assets, and thus an increase in fixed capital formation and GDP. Similarly, government purchases of defence equipment mostly count as public investment under the national accounts and contribute to higher GDP. I wouldn’t consider any of the above as investment in its traditional sense, though to be fair these usually don’t amount to a great portion of fixed asset accumulation.

On the other hand, every new building and road built is also an increase in fixed assets, and thus also an improvement in GDP. But these types of fixed assets do contribute directly and indirectly to greater growth potential down the road. New buildings provide space for business expansion, while new roads improve connectivity, reduce transport costs and form hubs for economic growth.

Wall Street – The Financial Hub

Some have criticised our current public and private investment programs on the basis that they are no more than “property plays”. These critics ignore the fact that on average 70% of gross fixed capital formation over the years has been investment in buildings, structures and properties, even back in the halcyon days of the 1990s. Public and private investment in buildings and structures usually form the bulk of fixed asset accumulation, not just for Malaysia but for most countries in the world. If such investments bring strong public benefits, as the MRT is likely to do, then all the better.

To sum up this series, we use the term investment to describe a wide variety of transactions, some of which don’t really involve investment in the way people take it to mean, which is improvement in productive capacity that helps boost long term growth. FDI for instance doesn’t always mean new factories or businesses, and there are some problems with relying on fixed asset accumulation as a measure of investment.

It’s a Global Marketplace

But these weaknesses shouldn’t distract from the underlying tale, which is still true – we need greater investment to improve productive capacity, to achieve sustained long term growth, and improve income levels and quality of life for Malaysians. Where we need to be cautious is in pursuing high investment growth for its own sake, without caring for type or quality.The views expressed here are the personal opinion of the columnist.

Photo credit: Flickr users James Hannan, epSos and Terra Nova.

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