Key Takeaways
- Autonomous Investment: Refers to investment expenditures not influenced by income changes or other economic factors. It represents investments based on long-term business strategies, technological advancements, or government policies. Autonomous investment is driven by internal decisions rather than external economic conditions.
- Induced Investment: Represents investment expenditures that are influenced by changes in income, demand, or other economic variables. It occurs when an increase in aggregate demand or economic growth leads to higher investment levels. Induced investment is responsive to changes in economic conditions and is driven by the expected profitability of investment projects.
- Difference: The key distinction between autonomous and induced investment lies in the factors driving investment decisions. Autonomous investment is determined by internal factors and independent of short-term economic fluctuations, while changes influence induced investment in economic conditions and demand levels. The autonomous investment represents long-term planning, while induced investment reflects short-term adjustments to economic circumstances.
What is Autonomous Investment?
Autonomous investment is defined as the type of investment independent of changes in the income level but influenced by the following factors: expectations of future profits, technological advancements, and market conditions.
One of the primary motivations for autonomous investments is the hope of future profits. Firms or organisations hoping for future profits and high returns may invest in new product development, research and development, and many other types that provide them with a competitive advantage.
Autonomous investment is financed through retained earnings, debt financing, or venture capital. Also, it carries a higher level of risk, and it includes more significant uncertainty in it. Examples of autonomous investment are – new product development and investment in technology.
What is Induced Investment?
Induced investment is the type of investment influenced by the fluctuation of income level, mainly changes in consumer demand. Increase in customer demand in the market, organizations/firms may invest in additional production capacity to meet the requirement of increased demand.
It is induced because it is the response to the changes or fluctuations in the economic environment rather than taking a deliberate decision for long-term growth or innovation, even though the finances are backed by short-term loans or credit facilities in induced investment.
Induced investment has a low-risk level if compared with autonomous investment. Examples of induced investment are – capital equipment, investments in inventory, and infrastructure.
Difference Between Autonomous Investment and Induced Investment
- Autonomous investment is defined as the type of investment independent of changes in the income level. While on the other hand, induced investment is a type of investment that is influenced by the fluctuation of income level.
- The cause of investment in autonomous investment is primarily technological investments, the expectation of future profits, and the changes in market conditions. On the other hand, the cause of investment in induced investment is primarily the government policies, changes in consumer demand, and level of economic activity.
- Autonomous investment is much more stable, and it is not affected by fluctuations in economic activity. Comparatively, on the other hand, induced investment is unstable and is much affected by the dynamics of the level of economic activity.
- Autonomous investments are financed by venture capital, retained earnings, or debt financing. At the same time, induced investments are financed by short-term loans or credit facilities.
- The risk level of autonomous investments is high and includes uncertainty and potential. On the other side, the risk level in induced investments is low.
- Autonomous investment has a long-term impact on the economy; considering the other side, induced investment has a short-term impact on the economy.
- Examples of autonomous investment are – new product development and investment in technology. While examples of induced investment are – capital equipment, investments in inventory, and infrastructure.
Comparison Between Autonomous Investment and Induced Investment
| Parameter of Comparison | Autonomous Investment | Induced Investment |
|---|---|---|
| Definition | The investment is independent of the changes in the level of income | The investment is influenced by the fluctuation of income level |
| Cause of Investment | Technological investments, expectations of future profits, and the changes in market conditions | Government policies, changes in consumer demand, and level of economic activity |
| Stability | It is stable and not affected by fluctuations in the level of economic activity | It is less stable and is much affected by the dynamics of the level of economic activity |
| Financing | Venture capitals, retained earnings, or debt financing | Short-term loans or credit facilities |
| Risk Level | High risk | Less risk |
| Impact on Economy | Long-term effect | Short-term effect |
| Example | New product development, investment in technology | Capital equipment, investments in inventory, and infrastructure |
Last Updated : 13 July, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
