What is a Capital Investment?
A capital investment is the acquisition of a fixed asset that is anticipated to have a long life of use before it has to be replaced or repaired. Two of the most easily recognizable examples of these types of investments are land and buildings. However, a capital investment is made any time that a company purchases goods that will be benefit the operation of the business, but will not be used to cover the operational costs of the business.
Of course, a capital investment does not have to be an asset that is along the lines of equipment or land. It can be something as simple as an amount of money that is set aside in some sort of interest bearing account. Since the resource is not being used to cover business expenses, capital assets of this type is free to be used for the purpose of generating additional revenue by accruing interest. Thus, it would be proper to consider an initial amount of money that is used to open a standard savings account as a capital asset, with the fact that a rate of interest will be realized from the principal each year turning the asset into a capital investment.
Many people think that in order to qualify as identification as a capital investment, the asset must be an item with a great deal of initial worth. In fact, fixed assets may carry any type of inherent worth. The main characteristic of a capital investment is not meeting some basic current value, but the fact that the item is not required for the normal expenses associated with daily living or business operation. Even the component of realizing some sort of interest is not necessarily a qualification for being understood as this type of investment. Money that is kept in a piggy bank or under the mattress would still qualify as a capital investment, since the money (a) is expected to have a long usable life, and (b) is not required to maintain daily operations of a business or the home.
@anamur-- That's a great question! Yes, companies can invest in any other country that is open to foreign direct investment. There are different rules and restrictions to investment in different countries. I know in China, there are lists of encouraged, restricted and prohibited investments and they decide on those based on which markets they want to allow investment in the country. In India also, foreign ventures and capital investment requires permission from the Central Bank of India.
A country might want to invest in other countries for different reasons. Foreign capital investment decisions are made based on market, resources, assets and efficiency.
I'm sure you've heard of a lot of US companies moving their production facilities overseas to Latin America or China because of lower worker costs. A company who invests in China can benefit greatly if it can buy the resources it needs at lower costs there, if it can benefit from the market and sell its products and services in China, if production will be more efficient and also if it can make capital investments that will gain from China's growing economy.
What about foreign capital investment, how does that work? I read that China has hit record levels in foreign investment. Can any company invest in any country and what are the benefits of doing so?
I find that financial forms often ask for any capital assets or financial capital investment to determine for example, the monthly payment for a loan or to determine a scholarship or financial assistance. Reporting capital investment seems voluntary to me though. I mean, if the asset does not necessarily have to be in material form or in a bank account, why should we have to report it? Furthermore, how do institutions plan on accounting for a company's or an individual's money under the mattress?
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