Capital, Labor Intensive Firms

Capital, Labor Intensive Firms - What Does Capital...

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What Does Capital Intensive Mean? A business process or an industry that requires large amounts of money and other financial resources to produce a good or service. A business is considered capital intensive based on the ratio of the capital required to the amount of labor that is required. Some industries commonly thought of as capital intensive include oil production and refining, telecommunications and transports such as railways and airlines. Investopedia explains Capital Intensive In all of the above industries, a large financial commitment is required just to get the first unit of good or service produced. Once the upfront investments are made, there may be economies of scale with regards to ongoing expenses and sales growth. But the initial hurdle to get into the business tends to keep the list of competitors small, creating high barriers to entry. Companies in capital-intensive industries are thus often marked by high levels of depreciation and fixed assets on the balance sheet. Capital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production , especially labor. At the level of either a production process or the aggregate economy, it may be estimated by the capital/labor ratio, such as from the points along a capital/labor isoquant . Capital intensity and growth The use of tools and machinery makes labor more effective, so rising capital intensity (or " capital deepening ") pushes up the productivity of labor. Capital intensive societies tend to have a higher standard of living over the long run. Calculations made by Solow claimed that economic growth was mainly driven by technological progress (productivity growth) rather than inputs of capital and labour. However recent economic research has invalidated that theory, since Solow did not properly consider changes in both investment and labour inputs. Dale Jorgenson, of Harvard University, President of the American Economic Association in 2000, concludes that: ‘Griliches and I showed that changes in the quality of capital and labor inputs and the quality of investment goods explained most of the Solow residual. We estimated that capital and labor inputs accounted for 85 percent of growth during the period 1945–1965, while only 15 percent could be attributed to productivity growth… This has precipitated the sudden obsolescence of earlier productivity research employing the conventions of Kuznets and Solow.’ [1]
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John Ross has analysed the long term correlation between the level of investment in the economy, rising from 5-7% of GDP at the time of the Industrial Revolution in England, to 25% of GDP in the post-war German ‘economic miracle’, to over 35% of GDP in the world’s most rapidly growing contemporary economies of India and China. [2]
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Capital, Labor Intensive Firms - What Does Capital...

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