Question

Explain how the following factors affect the requirements of fixed capital of a company :

(i) Nature of the business

(ii) Technology upgradation

(iii) Level of collaboration

Hint:

Say for each factor whether it raises or lowers the need for fixed capital, with one reason.

Answer 1

Step 1: Understand the question:
Fixed capital is the money put into long-term assets. The question asks how three factors change this need.
We explain each factor in turn.

Step 2: (i) Nature of the business:
The type of business decides the assets it must hold.
A manufacturing firm needs plant, machinery and buildings, so it needs more fixed capital.
A trading firm needs far less fixed capital, as it needs only a shop or a godown.

Step 3: (ii) Technology upgradation:
In some industries assets become outdated very fast because of new technology.
Such firms must replace assets often, so they need more fixed capital.
Where assets last a long time, the need is lower.

Step 4: (iii) Level of collaboration:
Some firms share plant and facilities with others, for example in a joint venture.
Sharing means each firm buys fewer assets of its own.
So the fixed capital need of each firm becomes lower.

Final Answer:
Manufacturing nature and fast technology change raise the fixed capital need, while collaboration lowers it.