Investment Policy Support

Understanding investment: basic concepts

Defining investment

Investment can be defined as a change in the stock of existing capital. Capital comes in many forms: financial capital, productive capital, fixed capital, working capital, as well as human capital, social capital and natural capital.

Different forms of capital cannot be simply added together to determine the total amount of capital available. They overlap and complement each other. Diverse agents (individuals, households, the private and public sector) exercise varying degrees of control and ownership over these different types of capital.

No substitute for domestic savings

Savings remain essential for financing investment. For sustainable development and poverty reduction, there is no substitute for increasing domestic savings. The bulk of investments in agriculture are made by the farmers themselves out of their own savings.

Fixed capital is a driving force

Most of the savings of farming household goes into formation of fixed capital, such as real estate and other assets. With fixed capital, farmers gain access to financial markets and can borrow working capital for further investment. No financial institution lends without some collateral. However, as indicated above, borrowed capital is always a smaller proportion of total investment. For this reason, fixed capital formation is a driving force for economic growth, development, and poverty and hunger reduction.

The importance of property rights

The crucial factors that allow for the formation of fixed capital are clearly defined property rights that are applied fairly and equitably to all under the rule of law. Property rights do not necessarily imply individual rights to land. What is essential is that these rights clarify who has access to and 'ownership' of the land. Unless these issues are addressed, any attempt to increase household investment in fixed capital is unlikely to succeed.

Role of investments

Sustainable food security, poverty reduction and agricultural development depends primarily on creating conditions under which agricultural investment, domestic savings and farm-level investments in fixed capital are united in a self-perpetuating cycle. Foreign investment and aid should contribute to strengthening this cycle. Public investment can compliment private investments in very positive ways.