Firm Investment
In the business world, Firm Investment is a powerful concept that involves the use of assets and funding to create and maintain long-term positive cash flow. Firm investment refers to those plans and strategies that result in the acquisition of fixed assets on behalf of an investor group or an individual. These assets are used to create a surplus cash flow system. This can be very helpful for creating and maintaining the economic freedom, or in other words, the ability of an individual or business to survive and prosper despite economic constraints.
The three major theories that underlie firm investment are the theory of permanent income, theory of relative efficiency, and theory of opportunity cost. According to the first theory, firms are protected from fluctuations in the price level by the elasticity of prices. According to the second theory, firms can successfully absorb losses that result from their purchase of fixed assets because these purchases are effectively insured against losses. Finally, according to the third theory, the availability of new investment opportunities results in the relative efficient allocation of capital in the economy.
The use of firm investment in boosting economy is highly beneficial because it contributes to both, increased income and economic freedom, both of which are vital components of sound finance. Increased income leads to a more productive workforce that is capable of investment, technology and innovation, and overall economic growth. On the other hand, increased economic freedom leads to domestic credit freedom and domestic growth. Proper allocation of capital enables businesses and households to make informed decisions regarding purchases, production, and sales, all of which contribute to the firm value.
For firms to properly evaluate the potential for future profits and losses, they must also carefully consider the current state of their firm investment portfolio. To this end, firms must take into account the present stock and retained earnings of their competitors as well as the performance of their own internal funds and short-term financing sources. This can be done through the use of market data and valuation models. Also, firms must ensure that their external assets are properly managed and are not overextended. Finally, firms should ensure a high degree of flexibility to adjust their short term and long term investment objectives as appropriate with their firm size, risk aversion, and other circumstances.
The relationship between firm investments, firm size, competition, and growth is a complex one. The key drivers of firm size and competition are: (a) net profit margins; (b) investment in fixed assets; and (c) level of foreign direct investment. As implied by equation (b), firms with higher levels of foreign direct investment have greater ability to gain a competitive advantage by improving productivity, developing new products, and selling goods and services to other firms. On the other hand, increasing fixed costs reduces the ability of firms to increase output and reduce cost of production. This, in turn, limits their ability to increase their net profits and expand their business share.
Therefore, flexibility, equity, and the size of the firm depend upon the conditions in the market, which also depend on the financing obstacles. Firms should capitalize on opportunities through mergers and acquisitions, debt financing, and asset financing. To achieve such opportunities, firms should be able to respond quickly and efficiently to changes in market conditions. They should also be able to absorb the losses that result from such events as failure to service debt and to meet its other obligations, or adverse cash flow effects resulting from disproportionate loss of assets or income to core shareholders due to their control of investment.
