What is Capital Accumulation? Discuss the factors that influence Capital accumulation

Capital formation or capital accumulation means the increase the stock of real in a country. In other words capital formation involves making of more capital goods, such machines, tools, factories, transport, equipment, materials, electricity etc, which are used for further production of goods. For making addition to the stock of capital savings investments and technical progress are essential. Capital accumulation is the very core economic development. It may be a predominantly private enterprise system like the American or a socialist economy like China and Cuba. Economic development cannot take place with technical progress such as construction of irrigation works, the production of agricultural tools and equipments and reclamation, building of dams, bridges and factories with machines installed in them, roads, railways and airports, ships and harbours, all the produced means of further production associated with high level productivity. In the view of many economists capital formation occupies the central and strategic position in the process of economic development.

Factors influencing Capital Formation:

Capital formation is not an automatic process. The rate of capital formation is different in different countries. This shows that capital formation is conditioned by certain factors. The following are chief factors that govern capital formation in a country.

(a)        Saving Creation: Savings are done by individuals or households. They do savings by not spending all their income on consumer goods. When individual or households save they release resources from the production of goods. Workers natural resources, materials etc thus released are made available for the production of capital goods.

A high rate of savings is possible if people are prepared to put forth effort to maximise output even with the resources available and are willing to keep down their expenditure with in reasonable limits. In other words level of savings in a country depends upon the power to save and the will to save. The power to save or saving capacity of an economy mainly depends upon the average level of income and distribution of national income. The greater the level of income greater will be the amount of savings. Another source of savings is government. The government savings constitute the money collected as taxes and profits made by state under takings i.e. government enterprises. Foreign trade constitutes third source of savings. Foreign trade is easily amenable to State control for revenue and other purposes.

(b)        Mobilizing of Savings: Next step in process of capital formation is that the savings of household must be mobilized and transferred to businessmen or enterprise that requires them for investment. This stage depends on the efficiency of machinery for the collection of savings viz, the capital market, banks, insurance companies etc.

(c)        Channelising Savings into investment: For savings to result in capital formation, they must be invested. In order that investment of savings should take place, there must be a good number of honest and dynamic entrepreneurs in a country who are able to take risks and bear uncertainties of production. Given that a country has got enough good and venturesome entrepreneurs, investment will be made by them only if there is sufficient inducement to invest. Inducement to invest depends on marginal efficiency of capital i.e. progressive rate of profit on the one hand and rate of interest on the other hand.

(d)        Foreign Capital: Capital formation in a country can also take place with the help of foreign capital or foreign savings. Foreign capital can take the following form.

(i) Direct private investment by foreigners.

(ii) Loans or grants by foreign governments and

(iii) Loans by international agencies like World Bank.