Induced Investment

Induced investment is the type of investment that goes up or down depending on how much money people are earning in the economy. When income levels change, this investment also changes.
Induced Investment
3 min

Induced investment refers to those investments that you make for financial gains. To explain it more clearly, let us consider an example. An induced investment involves investing money in stocks to make a profit in the future. You may also invest in a financial vehicle to earn higher interest rates. It also helps you make more money.

In this article, we will look into the definition of induced investment, provide real-world examples, and explore the various factors that determine these investments. We will also examine induced investment from both a business perspective and a retail investment standpoint, offering a comprehensive understanding of how changes in income influence investment behavior across different sectors.

What is induced investment?

An induced investment involves the utilisation of profits to make investments for growth or increase profitability. Besides the profit motive, induced investments do not have any other motives. This is significantly different from autonomous investments, which are influenced by factors other than profit motive such as the welfare of society and others.

Example of induced investment

Suppose, a company produces 1000 units of clothes from 100 machines. This example will help you understand what induced investment is.

Now, the company has decided to install AI-enabled machines that can increase productivity by 10 times. This means the company has to install just one new AI-enabled advanced machine to produce 1000 units of clothes. This means the productivity of the company increased. But the capacity did not. The company is still creating the same 1000 units of clothes but at increased productivity. The money the company spent on buying the new AI-enabled advanced machine will be considered an autonomous investment because the capacity did not increase.

Now, consider the case where the company anticipates a jump in the demand for clothes, thanks to a large consignment from a foreign country. Suppose, the company anticipates a demand for 2000 units of clothes. So, the company installed 2 AI-enabled advanced machines, which could produce 2000 units of clothes. Here, productivity and capacity both increased. In this case, the money spent on buying two new AI-enabled advanced machines led to an increase in capacity, which would lead to increased profit and income for the company in the future. That is why it is called an induced investment.

Also read about: SIP investment

Determinants of induced investments

The determinants of induced investment are primarily influenced by changes in income and economic conditions. These determinants include:

  • Changes in consumer spending: Induced investment is influenced by changes in consumer spending and demand. As consumer spending increases, businesses are more likely to invest in new projects or expand existing ones to meet the growing demand.
  • Business confidence: Changes in business confidence also impact induced investment. When businesses are more confident in the economy, they are more likely to invest in new projects or expand existing ones.
  • Interest rates: Interest rates also play a significant role in determining induced investment. Lower interest rates make borrowing cheaper, which can stimulate investment by making it more attractive for businesses to invest in new projects or expand existing ones.
  • Economic growth: Induced investment is also influenced by overall economic growth. As the economy grows, businesses are more likely to invest in new projects or expand existing ones to capitalise on the growing demand and opportunities.

Induced investment from a business perspective

If you invest in a business to make a profit or increase the future value of your investment, it is called an induced investment.

But how can you understand whether your investment in the business has gained profit for you? You can understand it as the profit of the company starts increasing. Let us understand it in more detail.

Suppose, a business starts to grow and make profits. Its manager starts investing the proceeds to increase the profit further, especially in multiples. A company’s ability to generate profit is directly related to the induced investment level. This means when a company makes more money as profit, it can invest more money for future growth. However, during recessionary times, a company reduces its investment activities so that it can recover its assets.

One of the most common examples we see in the real world is increased capital investment. Sometimes, companies need to invest in advanced machinery to replace the workforce. This helps them cut costs and consequently increase profit. It helps the company expand both vertically and horizontally. By adopting increased mechanisation, a company can diversify and also produce new products or expand to new markets.

Also read about: What is a one-time investment plan

Induced investment from retail investment perspective

Induced investment from a retail investment perspective refers to investments made by individual investors with the primary goal of earning financial gains. These investments are driven by the desire to maximise returns, build a secure future, combat inflation, and provide a financial safety net for retirement. Retail investors focus on assets that can generate high returns, such as stocks, bonds, or real estate, to achieve their financial objectives. This approach prioritises financial gains over other factors, leading to a focus on profit maximisation and growth.


When a business makes induced investment, it leads to financial prosperity because it is done to make profits. It helps you create a strong financial foundation.

Do you want to increase your financial prosperity in the future? If yes, you can start by investing in mutual funds to increase your income or profit. You can explore the Bajaj Finserv Mutual Fund Platform and check more than 1000 mutual fund schemes that are listed on the platform. You can calculate the expected returns with the SIP calculator or lumpsum calculator. Make the right decision and start investing now to fetch huge returns in the future.

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Frequently asked questions

What is the meaning of inducement to invest?

The inducement to invest is undertaken by a company when the consumer demand for the goods produced by the company increases.

What are the determinants of induced investment?

There are multiple factors determining induced investment including an increase in demand for its goods, a change in interest rates or wages, and an increase in income.

Why is induced investment important?

Induced investment is important because it is triggered by the motive of profit, which inadvertently leads to an acceleration in economic growth and creates a strong financial foundation.

What is the difference between autonomous and induced consumption?

If a business or a person has high disposable income or increased profit, it will be utilised to invest in avenues that further increase profit or income, even after paying regular bills. This is called induced consumption. If the income or profit is less or limited, it will be utilised to run regular operations such as paying bills. It is called autonomous consumption.

Is government spending autonomous or induced?

Government spending is mostly done with the motive of social welfare and the motive of profit is not the priority. That is why government spending is considered autonomous investment.

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