If you were to ask someone what to do with a large amount of money a century ago, people would have quickly suggested investing it in the land. Although the idea has shifted from investing in land to investing in the market, the idea remains the same. Therefore, it does not come as a surprise that a growing number of people are investing in the market. Among the types of investments, private investment is the one that gets talked about the least.
What is Private Investment?
Private investment or private equity refers to a type of alternative investment that is not enlisted on a public exchange. Typically, the capital in private investment is used to purchase, reshape, and invest in private organizations. Also, the money is made in private investments by fees from the investors. Limited partners and general partners are involved in private investments, in which the former owns 99 percent of shares with limited liability while the latter own just 1 percent of shares but with full liability. It is the preferred choice for startups and small businesses, as it provides them with access to liquidity without much hassle.
Measures to Stimulate Private Investment
1. Tax Reduction
Lowering taxes is always good for companies, as it enhances their investment. When it comes to personal and corporate tax, lowering these two can result in an increase in the overall income of the community, therefore, promoting private investment. However, it should be noted that lowering taxes must be done strategically, as it has been observed in the past that an abrupt drop in taxes usually drops the government revenue. Although economists are split on the idea of lower taxation for private investment, economists like Lerner and Klein are in favor of this idea. Interestingly, some economists even state that taxes should be higher for people that do not invest to relax taxes for direct investment.
2. Low Rate of Interest
As it is seen numerous times, lowering the rate of interest, especially during a recession, can have a profound effect on private investment. Two factors affect the probability of investment, the rate of interest and the marginal efficiency of capital (MEC). The latter refers to the expected rate of return from an additional capital purchase. If MEC is higher, then lowering the rate of interest can enhance private investment significantly. Along with this, monetary authorities can also boost private investment by lowering the bank rates. Additionally, providing credit that is both cheap and easy to access can also induce private investment.
3. The Government Spending
An increase in state spending is another means by which the economy can be stimulated to increase private investment. There are two ways to go on about this. The first one is pump-priming, in this, small amounts of capital are circulated in the economy, particularly during a recession; however, not with an intent to increase private investment, but to give citizens capital to invest. Additionally, direct investment by the government is another way to attract private investment. This is because private investors are looking for quick profits instead of long-term investments, like in public exchange. Interestingly, governments around the world actively take measures to balance the private investment within an economy.
4. Wage Cuts
While this may be controversial and not accepted by all economists, slashing wages to create a stable wage level can result in an increase in private investment. The theory behind this idea is that once the wages are reduced, the rate of production will also decrease, resulting in investment from private investors. Although this idea could work, in reality, cutting wages can have serious consequences, such as strikes, reduction in purchasing power, and a significant drop in GDP.
5. Price Policy
One of the major factors that contribute to a decrease in private investment is fluctuating prices. If the government is not actively trying to stabilize the prices, then private investors can quickly lose interest to invest. It should be noted that a stable price does not mean a fixed price that cannot be changed, instead, it means that the price should fluctuate in expected ranges. In the case of a price increase, the state can release the stocks to prevent a price hike, similarly, if the price is decreasing, the government can purchase in large quantities to stop the price from falling down.
6. Abolishing Monopoly
As mentioned previously, private investment is crucial for new businesses; however, when a monopoly exists within a market, private investment drops because investors find a lack of profit in such economies. Therefore, by abolishing monopolies, private investment can be encouraged.
Advancements in technology are crucial for the overall strengthening of the economy because with improved technology the capital-output ratio is increased, i.e., one unit of output can be produced with less capital. With a decrease in production cost, investors are attracted to invest in companies for large profits.
8. Economic Planning
Economic planning is one of those aspects that doesn’t apply only to private investment but to the entire economic system of a nation. With a planned economy, private investors feel that their capital will yield profits.