Non-industrialized countries are dependent upon industrial countries for a varying but large proportion of their capital equipment. In normal circumstances, the would-be manufacturer in a developing country has fairly free access to plant and machinery sources, subject always to the disadvantage of being much less familiar with the market than his counterpart in the industrial country. There are times, however, when the capacity of the machine-making industry is pre-empted because of events in industrial countries, and the dependence of less developed countries then becomes a major obstacle to growth. The situation appears even more unfortunate because at such times the supply of finished consumer goods from industrial countries is also likely to be restricted, and opportunities for the expansion of manufacturing industries substantially increased. Importation of second-hand machinery and use of equipment discarded by concerns in industrial countries also tends to result in high-cost production. In this way, shortage of capital goods has from time-to-time hindered industrialization, at least in its early stages when the developing countries have not been in a position to produce much of their own equipment.
A relic of the older pattern of denying newer, more productive machinery to developing countries survives in the case of special types of equipment which are not sold by the makers but are leased to users for a fixed annual rental and a royalty which varies with the machine's output.
In many cases the cost of capital goods to less developed countries is likely to be higher than to manufacturers in industrial countries, not only because the latter have a better knowledge of the market, but because, being nearer the source of supply and having the advantage of more developed domestic transport and engineering industries, they are able to have plants conveyed and installed more expeditiously and at lower cost. The higher the proportion of capital cost (interest and amortization) in total manufacturing costs, the greater is the relative disadvantage of the underdeveloped country. This handicap is of particular significance during and immediately after a period of rapidly rising plant and equipment prices. Dependence upon industrial countries for capital equipment also implies certain technical disadvantages for less developed countries. Plant design is usually dictated by the needs of the large domestic market rather than by the much more diverse needs of various small markets in under-developed areas. As a result, equipment is often poorly adapted to specific local conditions. Automatic devices suited to conditions in advanced industrial countries are often left unused in developing countries, while the intricacy of many machines, though appropriate to the type of labour available in industrial countries, tends to magnify repair and maintenance costs in factories in less developed countries which depend upon a high proportion of unskilled labour. This involves a competitive handicap for the manufacturer in the developing country compared with his opposite number in the industrial country. Another disadvantage which flows from dependence upon industrial countries for capital goods is the fact that technical improvements are quickly adopted by manufacturers in equipment producing countries, whereas those in less developed countries usually tend to lag behind.
Remoteness from the main area of technological advance is one important cause of delay in instituting changes in the factories of less developed countries. Shortage of capital is an even more compelling reason, for where capital is more plentiful, the rate of obsolescence tends to be higher and the tempo of technical progress faster. The technological gap between industrial and less developed countries therefore tends to be maintained.