Abstract

In this paper investment decisions are analysed separating the motivations for investment from the criterion adopted for assessing their profitability. Firstly, the motivations behind the investments are retraced to the innovative activity of the firms and to the competition interpreted as a process whereby firms retain their competitive position versus existing other firms and potential newcomers. The longterm determinants that appears important for understanding the investment process are, on the one hand, innovations and the creation of new markets and, on the other, the expectations of demand. A second plane of analysis concerns the relation between investments and expected profitability, which cannot be less than the real rate of interest plus a risk premium. After examining the possible effects on investments of a variation, taken as permanent, of the interest rate, it is argued that no systematic relation can be derived between variations of the real interest rate and investments. In the theoretical context of this analysis, indeed, while a change, taken as permanent, in the rate of interest does not affect the basic determinants of the investment, it does alter the condition of minimum profitability for all firms and sets off a mechanism of competition on the market for the products, through which the rate of profit adjusts to the real rate of interest plus a risk premium.