Definition
Capital investment is spending directed at acquiring or building physical productive assets — factories, machinery, vehicles, infrastructure, and tools — that will be used to produce goods and services over many future periods. In national accounts it is one of the core components of gross domestic product.
It differs from financial investment, which is the purchase of stocks or bonds. Capital investment in the economic sense creates real productive capacity rather than transferring ownership of existing claims.
Why it matters
How it works
Firms invest when the expected return on a project exceeds the cost of funding it. Lower interest rates reduce that cost and encourage more investment; pessimistic expectations or uncertainty discourage it. Because investment plans hinge on confidence about the future, they shift sharply, making investment the swing factor in the business cycle.
Capital investment is also the engine of capital deepening: sustained investment that outpaces workforce growth raises capital per worker and lifts productivity. An economy's capacity to invest depends on its pool of savings, which is why saving and investment are studied together.