Understanding Autonomous Investment & What Affects It

What Is an Autonomous Investment?

An autonomous investment is when a government or other body makes an investment in a foreign country without regard to its level of economic growth or the prospects for that investment to generate positive returns. These investments are made primarily for purposes of geopolitical stability, economic aid, improving infrastructure, national or individual security, or humanitarian goals.

Key Takeaways

  • Autonomous investment is the portion of the total investment made by a government or other institution independent of economic considerations.
  • These can include government investments, funds allocated to public goods or infrastructure, and any other type of investment that is not dependent on changes in GDP.
  • In contrast to induced investment, which seeks to take advantage of economic opportunities, autonomous investment is made for necessities or purposes of stability or security.

Understanding Autonomous Investment

Autonomous investments are made because they are deemed as basic necessities to individual, organizational, or national well-being, health, and safety, and are executed even when levels of disposable income for investment are zero or close to zero.

Autonomous investments include inventory replenishment, government investments in infrastructure projects such as roads and highways, and other investments that maintain or enhance a country's economic potential. They do not increase in response to higher gross domestic product (GDP) growth, or shrink in response to economic contractions, indicating that they are not motivated by profit, but rather by the goal of improving societal welfare. 

The 2009 American Recovery and Reinvestment Act (ARRA) provides many examples of autonomous investment.

Autonomous Investment vs. Induced Investment

Autonomous investments stand in contrast to induced investments, which increase or decrease in response to economic growth levels. Induced investments aim to generate a profit. Since they respond to shifts in output, they tend to be more variable than autonomous investments; the latter act as an important stabilizing force, helping to reduce volatility in induced investment.

For instance, as disposable income rises, so does the rate of induced consumption. This process applies to all normal goods and services. When people have more disposable income, they are in a better position to save or invest money to be used as future income.

Autonomous and induced investments can be thought of in terms of the marginal propensity to invest (MPI): the change in investment expressed as a proportion of the change in economic growth. When that marginal propensity is zero, the investment is autonomous. When it is positive, the investment is induced.

Factors Affecting Autonomous Investment

Technically, autonomous investments are not affected by external factors. In reality, however, several factors can affect them. For example, interest rates have a significant impact on investments made in an economy. High-interest rates can tamp down on consumption while low-interest rates can spur it. In turn, this affects spending within an economy.

Trade policies between countries can also affect autonomous investments made by their citizens. If a producer of cheap goods imposes duties on exports, then it would have the effect of making finished products for outside geographies more expensive.

Governments can impose controls on an individual's autonomous investments through taxes, too. If a basic household good is taxed and no substitutes are available, then the autonomous investment pertaining to it may decrease.