What are the prospects for domestic capital formation in DVC?

Question

What will be an ideal response?

Answer 1

The prospects are bleak. Domestic capital formation requires a reallocation of some production from consumer goods to investment goods, and it requires a reallocation of incomes from consumption to savings. The reallocation of production from consumer goods to investment goods may not occur because there are few incentives for domestic capital formation in DVCs. The number of entrepreneurs willing to take risks is few and the economic incentives in the form of expected profits may not be sufficient to encourage much investment in capital goods. Furthermore, the lack of infrastructure and public capital that complement and enhance private investment makes any private domestic investment project more difficult or more likely to fail.
In addition, many citizens of DVC are too poor to save much of their incomes, which means the pool of savings for investment is small. Those richer citizens with higher incomes and savings may prefer to invest those savings in IACs rather than risk losing the funds in a DVC. This capital flight problem further reduces the pool of potential savings.