What Is an Induced Investment?

Malcolm Tatum

An induced investment is a type of capital investment that is influenced by what type of shifts in the economy are currently occurring, and how those shifts affect the value of that investment. Unlike an autonomous investment, which remains somewhat unaffected by changes in the marketplace, an induced investment will typically respond to whatever is causing a shift in factors such as the buying habits of consumers in an effort to keep the investment viable. Many types of investments are considered induced, making it necessary to identify and monitor any factors that could cause the investment to increase of decrease in value.

Economic shifts may spur specific types of capital investments, which are referred to as an induced investments.
Economic shifts may spur specific types of capital investments, which are referred to as an induced investments.

Understanding what constitutes an induced investment can make it easier to have some idea of whether or not a given opportunity is worth the time and resources to acquire the investment. For example, if an investor is considering the potential of buying stocks in a company that produces striped socks, the investor will need to ascertain whether or not that type of business operation will see profits increase or decrease based on the movement of the economy and the tastes of consumers. Since striped socks would probably be considered more of a novelty than a necessity, this means that if the economy should begin to wane and consumers have less money to spend on non-essentials, the market for striped socks would likely shrink accordingly. Only by analyzing the market and determining if the economy will remain robust and that consumers actually want striped socks can the investor decide if buying the stock is a good idea.

Other factors can also have some influence on the movement of an induced investment. For example, changes in import and export laws may create situations that inhibit the acquisition of certain goods, a factor that could decrease profits and make the investment less attractive. In like manner, changes in the tax laws that affect the ability of certain businesses to function may also make investment in those companies less appealing to investors.

With any type of induced investment, there are events that could occur and have a direct impact on the value of the investment. That impact may be negative, in that the events cause increased demand for the underlying asset, or demand may decrease to the point that the investor begins to lose money on the holding. By identifying which factors could affect the value of the asset and also assess the likelihood of those events occurring, the task of deciding whether to acquire that investment is much easier.

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