2.2.2 Suppliers And Users Of Capital

THE SUPPLIERS AND USERS OF CAPITAL

An adequate supply of capital is essential for Canada’s well-being. In manufacturing, for instance, capital supports the expansion of facilities, improves productivity, boosts competitiveness in domestic and foreign markets, and encourages the development of innovative and sought-after new products. When capital investment is insufficient, industry stagnates, unemployment increases, and living standards decline. The suppliers and users of this crucial capital are outlined below.

SUPPLIERS OF CAPITAL

The primary source of capital is savings in various forms. When revenues exceed expenditures, savings can be invested. This basic principle applies to all types of investors:

Individuals

If the returns from postponing current consumption are high enough, individuals are likely to save more today to spend in a more favorable future. They might be more inclined to spend when the compensation is low or when certain incentives, such as tax breaks, are available.

Non-Financial Corporations

Corporations like Canadian steel makers, food distributors, and machinery manufacturers mainly generate savings in the form of corporate earnings. These internally generated funds tend to be retained for internal use and are not typically invested in other companies’ stocks or bonds. Therefore, such corporations are not major suppliers of permanent funds in the capital market.

Governments

Some governments manage to operate at a surplus, enabling them to invest their profits, thus becoming suppliers of capital. In contrast, other governments run at a deficit, requiring them to borrow from the capital markets, thus becoming users of capital.

Foreign Investors

Canadian establishments are favored by both corporate and individual foreign investors. Canada has traditionally relied on foreign savings for both direct investments in Canadian industries and portfolio investments in Canadian securities.

USERS OF CAPITAL

The users of capital include individuals, businesses, and governments, whether Canadian or foreign. Capital not only flows into Canada from foreign entities, but it also flows out as foreign users (mainly businesses and governments) leverage Canadian capital by borrowing from Canadian banks or making their securities available on the Canadian market. Canadian capital is particularly attractive when its value is low relative to foreign currencies. Conversely, Canadian investors benefit by diversifying their portfolios with foreign securities.

SUPPLIERS AND USERS OF INVESTMENT CAPITAL: A SUMMARY

Below is a summary table detailing both the sources and users of investment capital:

KEY TAKEAWAYS

• Suppliers of Capital: Key suppliers include individuals, non-financial corporations, governments, and foreign investors, with savings forming the main source of capital.
• Users of Capital: Capital is essential for individuals, businesses, and governments for expenses ranging from personal purchases to large-scale projects and business continuity.
• Capital Flow: The flow of capital into and out of Canada is vital, influenced by factors such as the relative value of currencies and investment incentives.
• Investment Diversification: Both domestic and international capital flows allow Canadian investors the opportunity to diversify their portfolios and manage risk.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q1: Why is capital important for a country’s well-being? A1: Capital is crucial because it supports industrial expansion, productivity improvements, competitiveness, innovative product development, and overall economic growth. A lack of capital leads to industrial stagnation, higher unemployment, and lower living standards.

Q2: Who are considered key suppliers of capital? A2: Key suppliers of capital include individual savers, non-financial corporations, governments with surplus budgets, and foreign investors.

Q3: How do businesses generate and utilize capital? A3: Businesses generate capital through internal profits and savings, which are used to sustain operations, maintain equipment, and expand activities. They also borrow from financial intermediaries or raise capital via securities markets.

Q4: What role does government play as a user of capital? A4: When revenues fall short of expenditures or for large projects, governments issue securities in public markets or guarantee the debt of Crown corporations to meet their financial needs.

GLOSSARY

• Capital: Wealth in the form of money or assets, used to invest and generate further income.
• Savings: The portion of income not spent on current expenditures that can be invested.
• Non-Financial Corporations: Companies involved in manufacturing or providing services apart from banking and financial services.
• Institutional Investors: Entities like pension funds and mutual funds that invest large sums of capital.
• Securities: Financial instruments, such as stocks or bonds, that represent an ownership position or creditor relationship.

ILLUSTRATIVE DIAGRAM

Capital Flow Chart in Canada

    graph TD
	    A[Suppliers of Capital]
	    B1[Individuals]
	    B2[Corporations]
	    B3[Governments]
	    B4[Foreign Investors]
	    C[Capital Markets]
	    D[Users of Capital]
	    E1[Individuals]
	    E2[Businesses]
	    E3[Governments]
	
	    A --> C
	    B1 --> C
	    B2 --> C
	    B3 --> C
	    B4 --> C
	    C --> D
	    D --> E1
	    D --> E2
	    D --> E3