Capital - American businessAlong with labor, natural resources, and ENTREPRENEURSHIP (managerial ability), capital is one of the four factors of PRODUCTION. The sources of capital for a firm are represented by the items on the right-hand side of its BALANCE SHEET; debt, preferred stock, COMMON STOCK, and retained earnings. Capital is a major determinant of a firm’s size. Since it is relatively more abundant for firms organized as CORPORATIONS than it is for PROPRIETORSHIPs and PARTNERSHIPs, the largest firms are corporations. When various forms of debt, BONDS, and other liabilities are sources of capital, the cost of this borrowed capital is interest expense. When EQUITY (preferred and common stocks) and retained earnings are sources of capital, the cost of this capital is the return on equity to stockholders. On the other hand, the owners of capital earn interest income if they are creditors or bondholders; they earn DIVIDENDs and CAPITAL GAINs if they are stockholders. Financial intermediation, the flow of capital from those who have to those who need, is necessary for ECONOMIC GROWTH. The more efficiently capital flows, the greater will be economic growth. A system of well-developed FINANCIAL INTERMEDIARIES is the cornerstone of all advanced economies, whose growth is attributable in large part to well-organized financial markets. Conversely, the lack of well-organized financial systems hinders economic growth. Lesser-developed countries are characterized by a paucity of financial intermediation. When financial intermediation is absent, capital is extremely scarce for those who need it.
See also VENTURE CAPITAL.