Capital intensity refers to the weight of a firm’s assets—including plants, property, and equipment—in relation to other factors of production. A capital-intensive technology is one that uses more capital capital intensive technique refers to relative to labor to produce a given output. For all such requirements, there will billions of USD dollars needed as upfront costs that will be included as assets in the balance sheet of the company.
What is capital intensive vs extensive?
Extensive growth in its pure form is based on quantitative increases in labour, capital and land, whereas intensive growth is derived from gains in overall productivity, i.e. increasing efficiency of labour and a better utilization of capital and other means of production.
Another example of capital intensive techniques are often found in car production. Labor intensive is where most of the production is carried by workers or employees. It means that the levels of output would be at a much smaller scale than a labor intensive industry.
Overview of Capital-Intensive Technology
This makes new capital-intensive factories with high tech machinery a small share of the marketplace, even though they raise productivity and output.  Some businesses commonly thought to be capital-intensive are railways, aircraft manufacturing, airlines, oil production and refining, telecommunications, semiconductor fabrication, mining, chemical plants, electric power plants,
etc. Countries should make use of their ability to draw upon the scientific and technological
advancement of the more developed countries if they want to industrialize at a faster rate. Capital intensive technique refers to that technique in which larger amount of capital is
comparatively used. In such a technique the amount of capital used per unit of output is larger
than what it is in case of labour intensive technique. A few organizations that are capital-intensive need higher capital to channel the business operations which implies that the maintenance cost is additionally high in such ventures.
The capital intensive companies need higher money to keep the operations going that means the maintenance cost is also high in such industries. These companies have higher operating leverage as operating cost becomes higher due to high investments in fixed assets and machinery. The market standing of these industries is based on the services they provide, maintenance of assets, labour efficiency, productivity, risk factor etc. In short, if capital expenditure is much more than the labour expenditure then the organization is said to be capital intensive. Capital intensive refers to the production that requires higher capital investment such as financial resources, sophisticated machinery, more automated machines, the latest equipment, etc.
My OpenLearn Profile
Labour-intensive production means that the way that a good or service is produced depends
more heavily on labour than the other factors of production, such as capital. Labour intensive
method of production is usually used for individual or personalised products, or to produce
on a small scale. Examples of labour-intensive production are hotels, restaurants, small scale
farming, pole-and-line fishing, mining etc.
- Another way to measure a firm’s capital intensity is to compare capital expenses to labor expenses.
- The costs involved in a labor intensive production unit would be the costs of training and educating employees.
- Capital intensity can also be measured by comparing the capital expenditure and revenue expenditure if capital expenditure is more than the revenue expenditure then the organization is said to have a high capital intensity.
To avoid this backwardness of the economy, the capital-intensive technique is a must. The capital intensive is measured on the basis of capital deployed by the organization in purchasing the fixed assets. It is defined as the capacity of the organization to invest in fixed assets. Higher investment leads to higher returns and which results in more investors and more market share. Some businesses need higher capital to start the businesslike airlines industry.
True or false? A capital-intensive technology is one that uses more capital relative to labor to…
With optimized capital intensity, there come laborers who work with the machines with adequate abilities and skillsets. If you are a software supplier, you will be supposed to make programming products and sell them for a profit. You will just need to hire engineers and hence, the main upfront expenses will be their compensations or salaries. In case you are a utility service provider who wants to set up a plant for offering electricity, then for this, you will be required to build either wind, coal, or nuclear power stations. Some of the common examples of such industries can be transportation sectors such as airways, railways, waterways that need loads of investments in purchasing the transportation medium or creating the transportation medium. If you’re new to university-level study, read our guide on Where to take your learning next, or find out more about the types of qualifications we offer including entry level
Access modules, Certificates, and Short Courses.
In such businesses or industries, the operating and maintenance cost will also be more as the assets need constant servicing and maintenance. However, such businesses save the tax as the devaluation or depreciation and other expenses are higher which brings about lower ROIs. With the help of EBITDA, it will become simpler to compare the performance of companies in the same industry.
Capital-intensive businesses will quite often have higher degrees of operating leverage that can be understood as the ratio of fixed costs to variable costs. Therefore, such industries need an optimized volume of production to give a sufficient ROI. It additionally implies that little changes in sales can prompt huge changes in profits and return on invested capital. On the other hand, the developed countries or industrialized countries like Japan, the USA, and European countries prefer using capital intensive production processes. The industrialization era and subsequent industrial revolutions until now have made these countries the high-earning countries, as their products are cheap yet efficient, and provide high value for money in the international market.
The promotion of a capital-intensive industry also requires a huge interest in fixed resources. Such sorts of huger investments require adequate reserve funds or savings or the ability of firms for financing the investments. • Labor intensive refers to production that requires a higher labor input to carry out production activities in comparison to the amount of capital required. While deciding whether a business or company should go for capital intensive setup or not, a few reasons or decisions go in the process. In some of the organizations, being initial capital intensive is mandatory like power, utilities, automobiles, while there are other businesses where being high capital intensive is a choice such as software, streaming, etc. Developing countries and developed countries- The labor is more abundant and capital is scarcer in developing countries than in developed countries.
What Is Capital Intensive?
These include various natural resources, labor, technology, and the organization. The efficient and accurate amalgamation of these resources leads to the desired level of output. Industrial progress was expensive and business people faced real problems.
- For example, if a company spends $100,000 on capital expenditures and $30,000 on labor, it is most likely capital-intensive.
- Capital-intensive production This refers to techniques of production, and represents the proportion of capital (machinery, equipment, inventories) relative to labour, measured by the capital–labour ratio.
- Understand what a production process is, identify the various types of production processes, and review several examples.
- The early textile mills had required relatively small amounts of capital in comparison to the new ironworks and steelworks.
- A labor-intensive production technique is one which uses a much larger amount of labor compared to the amount of capital it uses.
What is the argument for capital intensive techniques?
With the help of capital intensive techniques goods can be produced at a lower cost. Under labour intensive methods of production the consumers have to pay higher prices while under capital intensive technique of production one obtains cheaper goods produced on a large scale with modern methods.