Factors influencing Capital Accumulation

Factors influencing Capital Accumulation

Factors influencing Capital Accumulation

Capital Accumulation means company that makes profits to increase the capital base. It is a process of acquiring more assents in order to create more wealth which will appreciate in value. It involves making of more capital goods such as machines, tools, factories, transport, equipment and materials. Capital accumulation is an essential factor to accomplish a robust economic development. Unless a certain minimum rate of capital accumulation is maintained, particular country cannot make their economic progression. Capital accumulation has many chief factors that are described as below:

  • Savings Creation

Savings are the backbone for investments as higher savings leads to higher investments. Savings are generally done by individuals or households. People do not spend all their income on consumer goods but make some of the amount as savings. Saving capacity largely depends on the average level of income and distribution of national income, higher productivity, enterprise and sufficient capital equipments and other demographic factors. Obviously, the level of income determines the amount of savings. The other two sources of savings are government savings and foreign trade. Taxes collected from people by the government and revenue by foreign trade results in saving creation.

  • Mobilizing of Savings

After the savings creation, it must be mobilized and transferred to enterprise or businessmen who need them for investment. The means of mobilizing the savings are done through banks, insurance companies and capital market.

  • Channelizing Savings in to Investment

Investment has to be done in order to result in capital formation. To make the investments, honest and dynamic entrepreneurs are essential who should be ready in taking risks and face uncertainty in business issues. The investment are encouraged to the business men based on the rate of profit on one hand and rate of interest on the other hand.

 

 

  • Foreign Capital

Capital accumulation can also be done with help of foreign capital or foreign savings. It can be done in the following form as shown below:

  • Direct private investment by foreigners
  • Loans or grants by foreign governments
  • Loans by international agencies like World Bank

But greater reliance on foreign aid is highly risky which has to be avoided.

Therefore, capital accumulation involves both net addition and redistribution of wealth. In a nutshell, capital accumulation is made by investment in tangible means of production, investment in financial assets and investment in non-productive physical assets.

 

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