SOURCES OF CAPITAL FORMATION
There are two types of sources of capital formation.
(i) Domestic Sources
(ii) Foreign Sources
Domestic Sources
These are the domestic sources of capital formation.
(i) Individual Savings
It is that part of the income of an individual that is not consumed on consumer goods. The saving is a directly proportional function of income i.e. S = f(Y). The level of savings in a country depends upon the power to save and the will to save. The higher the level of income, the greater will be the amount of savings.
(ii) Business Savings
Business enterprises save when they do not distribute the whole of their profits but retain a part of them in the form of undistributed profits which are used for investment in real capital.
(iii) Government Savings
The government savings constitute the money collected as taxes and the profits of the public sector. The greater will be the government savings. These can be used by the government for holding up new capital goods like factories, machines, roads, etc or it can lend them to private enterprises to invest in capital goods.
(iv) Public Borrowing
It is an important source of capital formation. It acts as an anti-inflationary measure
by mobilizing surplus resources to the productive channel.
(v) Deficit Financing
It is newly created money and is an important source of
capital formation in a developing country. It is the method on which the
government can fall back to obtain funds but it may lead to inflationary
pressures in the economy.
(vi)
Disguised Unemployment
The surplus agricultural
workers can be transferred from the agricultural sector to the non-agricultural
sectors without diminishing agricultural output. These un-productive workers
can be employed in various capital creating projects such as roads, buildings
canals, health centers, etc.
Foreign Sources
If the internal sources are
insufficient for the economic development of a developing country, then the capital formation can take place with 
the help of foreign capital
which have the following forms.
(i) Direct
Private Investment
Private foreign companies have an important role in capital formation by investing in the private sector
directly.
(ii) Foreign Loans
Developing countries are receiving a good amount of foreign capital in the shape of loans or grants from other developed countries e.g. the Government of Pakistan gets foreign loans from the U.K., U.S.A.
(iii) Loans From
International Agencies
Some international agencies or institutions provide loans to a county' which is also a source of capital formation e.g. World Bank, Islamic, etc.
(iv) Restriction
on Imports
All luxury imports should be restricted and the foreign exchange so saved should be utilized in importing capital goods. This measure can be successful only if the domestic income saved on imported consumer goods are not utilized on luxury or semi-luxury goods but it should be utilized in importing capital goods which are necessary for the economic development of the economy.
(v) Foreign Remittances
The population growth rate is high in developing countries. The increasing rate of labor force leads to unemployment. This surplus foreign remittances to his homeland (i.e.$14970 million in Pakistan). These remittances will increase capital accumulation, therefore; it is also a source of capital formation.
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