Question

Explain the following factors affecting the requirements of fixed capital of a company :

(i) Diversification

(ii) Level of collaboration

Hint:

Diversification needs extra long-term assets, so fixed capital rises. Collaboration lets firms share assets, so fixed capital falls.

Answer 1

Step 1: Meaning of fixed capital:
Fixed capital is the money a company puts in long-term assets such as land, buildings, plant and machinery. These assets stay in the business for many years.
The amount needed differs from firm to firm. We now see how diversification and the level of collaboration change it.

Step 2: Factor (i): Diversification:
Diversification means adding new products or lines to the business, or expanding into new areas. A company that diversifies needs extra plant, machinery and buildings.
So its fixed capital requirement goes up. A firm that sticks to one product line needs less fixed capital than one that grows into many lines.

Step 3: Example for diversification:
Suppose a biscuit maker starts making packaged juices. It must buy new machines and set up a new unit.
This extra investment in long-term assets raises the fixed capital needed.

Step 4: Factor (ii): Level of collaboration:
Level of collaboration means the extent to which enterprises join hands and share facilities and resources with each other.
When a firm shares plant, storage or other facilities with another firm, it does not need to buy all assets on its own. So its fixed capital requirement falls.

Step 5: Example for collaboration:
Two small manufacturers may use one common testing laboratory and warehouse. Each one then invests less in fixed assets than it would alone.
A firm that works alone has to build every facility itself, so its requirement stays high.

Final Answer:
Diversification increases the fixed capital requirement because new assets are needed. A higher level of collaboration reduces it because assets are shared.