To get a better understanding of how National Capital Formation works and why it is important, we only have to think of Japan and Germany after World War II. The economies of these two countries were in ruins, and within 30 years both of them emerged as superpowers. In fact, even Taiwan and Hong Kong are in great shape (even though they were once part of China). Capital formation is important and has to be managed well.
There are distinct sets of economies – developing, emerging and less developed countries (LDC). Developed countries have invested their capital well and have the necessary infrastructure and human capital in place to function efficiently. Developing countries are soliciting and receiving capital to develop and update their infrastructure and offer goods and services needed by other countries. LDCs lag behind as they are unable to come up with enough capital to plough back into their economies. The distinction is also made on the basis of income levels per capita.
Let us first define the terms.
This can be achieved with foreign involvement – economic growth should confer benefits on a wide cross section of society and not just a few individuals. Capital requirements can be organized from within the economy and also from outside investments. Once there is enough evidence that a country is capable of utilizing resources well, other sources for investment are made available to let an economy realize its potential.