Investment Expenditures Represent the Corporate

Investment Expenditures represent the corporate world's spending, and are a significant component of the GDP. It is also a volatile component. There are a wide range of considerations that go into the investment decisions that companies face, from their competitive situation to the economic outlook for their industries to the availability and affordability of financing. As governments seek to pull the world's economies out of recession, they often approach the issue from the supply side, using the tools at their disposal to attempt to stimulate investment in the corporate sector.

However, the effectiveness of these tools is not universal. Under some conditions, they work well; yet under other conditions, such as the current ones, they are less successful at providing economic stimulus. This paper will examine the issue of investment expenditures to determine some of the factors that go into investment decisions, in an attempt to shed some light on how investment expenditure can be stimulated. The paper will study the courier industry, long considered an economic bellwether.

Investment expenditure is defined as the planned addition to physical capital and inventories. In Keynesian economics, the chief determinant of investment expenditure is the expectation of future demand for a firm's output. Expenditures are undertaken today to build out capacity to meet expected future demand. Expectation of future demand is derived from a wide range of factors. These included expected future economic performance, the competitive situation and interest rates. With respect to the courier business, expected future economic performance is the most important variable for decisions regarding investment expenditure.

The industry is characterized by high fixed costs, associated with airplanes, trucks and physical facilities. As with any airline, capacity is perishable. The industry has a broad customer base, consisting of both businesses and consumers. Therefore, aggregate demand in the economy is a key driver. When the overall economy is booming, firms reach capacity and are forced to expand; when the economy is expected to slump, firms understand that they will have excess capacity. There are other factors, however.

Demand for a firm's products and services also stems from their competitive position. While the overall industry's expenditures may relate closely with the expected future economy, individual firms must also consider their own performance within the industry when making decisions. They need to consider if their businesses have the opportunity to expand by winning market share from competitors. If they feel like they are in a position to do so, they may make expenditures in order to facilitate this.

Such expenditures would have a net influence on the overall investment expenditure because the capacity of competing firms has already been paid for, therefore the reduction in their business does not reflect a drag on investment expenditure. Another factor, one that the government uses to influence investment expenditure, is the cost and availability of capital. Interest rates are used to influence investment. Most firms, when making investment decisions, use some form of capital budgeting analysis. Investments must yield more than they cost.

The cost component is determined by the firm's cost of capital, which in most firms is strongly correlated to the prevailing interest rates. By lowering interest rates, the government lowers the threshold of expected return for capital investments, thus making more investments economically viable. However, such supply side initiatives are weighed by firms against the potential income. If the economic outlook - that is to say the expected demand - is poor, such that the expected return will still not exceed the cost, then the investment will not be undertaken.

In speaking with a local FedEx station manager, investment decisions are typically made at head office in Memphis. The decisions are based on expectations of future demand. Most capacity decisions at FedEx involve land and building acquisitions (new stations) or airplane leases. Thus, they are typically made on the basis of long-term demand projections. These relate to specific measures such as long-term economic growth of the region, population growth of the region and other long-term macroeconomic indicators.

The timing of decisions, however, can relate to the short-term economic situation, including the cost of capital. The company may delay investment to preserve profits during times of poor economic performance. This is because of the close correlation between the state of the economy and the firm's revenues. Moreover, the company seeks to time the completion of capital projects with the point in time when that capacity will be needed.

Therefore, an economic slowdown pushes back the time when the capacity will be needed, justifying a delay in the investment expenditure. These reasons are similar to what has been discussed in class. The main driver is still expected future demand, as such investment decisions are almost entirely related to system capacity. One factor that was not discussed, however, was the cost of capital. In general, the.