Inadequacy of the domestic market

The development of domestic industry depends very largely upon the size of the local market, but this in turn, though ultimately a function of the national income and its distribution, depends partly upon machinery for taking the product to the potential consumer. The effectiveness of this distributive organization is one measure of the adequacy of the economic framework. Where the commercial sector is poorly equipped to handle the output of local factories, the absorptive capacity of even the small domestic market is not fully realized. Inadequacy of the commercial sector not only reduces the size of the accessible market and throws the burden of carrying stocks of finished goods and organizing their distribution, at least partly, onto the factory; but it also magnifies problems of supply, making it necessary for the producer to maintain larger stocks of raw materials and consumable stores than would be required if ordinary trade channels were more effective.

Increased stocks - and the consequent increase in costs - are also a factor in the organization of equipment and machinery, for the lack of repair facilities and ancillary industries in the under-developed country may render it necessary to carry more spares and replacements than would otherwise be required and, in some cases, to instal standby plants in order to assure continuous production or at least avoid unduly long breakdown delays.

[Developing countries] Low per capita national income is one of the principal attributes of less developed countries. Low personal incomes, in turn, are reflected in a pattern of expenditure which is very unfavourable to secondary industry; in general, the lower the income the higher is the proportion spent on food, much of which is unprocessed. It is only as income rises that a market for manufactured products is created. This is one of the ways in which the process of industrialization, when soundly conceived and executed, tends to be cumulative: the higher incomes which flow from new investment and employment are among the principal elements of an expanded demand for manufactures. Nevertheless, many under-developed countries are too small - quite apart from income levels - to be able to sustain factories of economic size in more than one or two segments of secondary industry. The attainable level and patterns of industrialization in such countries are obviously limited.