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It is a well-known fact that capital is scarce in most of the
developing countries and thus some of the production factors, such as
labour, remain unemployed, leading to a lower growth rate of G.N.P. than
would be possible under full employment. Additions to the stock of
capital not only increase the rate of growth but also provide new job
opportunities. However, in many developing countries, capital is
utilised less than one-third of the time [10,p.38], The underutilization
of capital obviously shrinks the growth rate of less deve¬loped
countries still further. Capacity underutilization discourages
technological progress which leads to an inefficient industrial
structure. This presents us with a paradox: if capital is scarce in
developing countries, why is it underutilized? A number of hypotheses
have been advanced to explain this paradox. Some of these hypotheses
relate to oligopolistic structure of the market, deficient demand,
non-availability of complementary factors of production (such as skilled
labour), imported inputs and government licensing policies. Moreover,
when aid is available for specific projects, there is a tendency to
build up addi¬tional capacity because the recipient countries prefer
some aid to no-aid. However, very little has been done so far in
building a theoretical framework which could be used in empirical
analysis to throw light on the possible causes of capacity
underutilization. Marris's theoretical framework [4] and Winston's
empirical investigation of capacity utilization in Pakistan [10] are
exceptions.