Role of investment in economic growth

The investment has a very important role in the expansion and growth of the economy in the long term. It has also historically played a key role in various successful processes of stabilization, followed by periods of economic growth.

When studying the factors that affect the private investment, developing countries should take into consideration relevant elements not considered by traditional theories, among which are financial variables which may influence the private investment due to the existence of a financial system underdeveloped or the presence of financial repression. The rationing of foreign currency and the exchange rate in the free market can influence the investment decisions since a large part of capital goods in developing economies are imported. Given the importance of the public sector in capital formation in the developing countries, public investment and its composition could be an important determinant of private investment. Macroeconomic instability and the resulting uncertainty are also factors that should be considered.

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