Overcapitalization: Definition, Causes, and Example

The second example illustrates the reverse case, a Figure 6type situation. It involves the Norwegian Spring Spawning Herring stock, alsoreferred to as the Atlanto-Scandian Herring stock. Historically, this stock wasamong the larger and more valuable stocks of the North Atlantic. When depressed, itis confined to Norwegian waters (Bjorndal et. al., 1997). Another social evil of over-capitalisation is promotion of gambling habits by providing scope for gambling in shares of such a company.

the management of fishing capacity

This surplus capital can negatively affect the corporation’s financials and profits and return on investment. The first step for a company to correct the situation is by carrying out adequate internal investigations. The findings of such investigations should help management determine if management abuse, miscalculation of capital needs, or poor Financial Statements are the primary causes.

4 Incentive adjusting

It is interesting that, in both instances, measures whichindividually are incentive blocking in nature, when combined, act to some degreelike incentive-altering measures. The OECD report does complain that thecombinations are less efficient than true IQs, particularly the transferablevariety. Be that as it may, given that the efficacy of IQs is not withoutlimits, particularly in developing countries, the “second best”combinations remain worthy of serious consideration. We consider a case in which the“conventional” capital is non-malleable to the following extent.

The adjustment problem, with which we are nowconfronted, involves the simultaneous “investment” in the naturalcapital, the resource, and disinvestment in the “conventional”capital. The nature of the optimal adjustment depends critically upon the“malleability”, or lack thereof, of the “conventional”capital. If the latter is highly malleable, then it makes sense to go for aradical programme, in which there is rapid investment in the resource and rapiddisinvestment in the “conventional” capital.

1. This is the most commonly used and effective method of correcting under-capitalisation.
2. With the passage of time, the price of these fixed assets, initially purchased earlier at a higher price, may decrease.
3. Inother words, the modes of production and the nature of the activity have evolvedand so has the context of fisheries management (Christy, 1996).
4. A company may become overcapitalized if it buys assets that are priced too high or acquires assets that don’t fit into its operations.
5. It is thereforedifficult to assess the efficacy of decentralized methods.
6. When Canada implemented Extended Fisheries Jurisdiction (EFJ)in 1977, 95 percent of the Northern Cod resource became subject to Canadiancontrol and management.

Hence, we could anticipate that ITQ holders would begin tocoalesce and to act like de facto collective owners of the resource (Munro,1997). It is observed in New Zealand that, in some ITQ fisheries, the ITQholders are forming themselves into so-called “Quota HoldingCompanies”. It is further observed that ITQ holders are being called uponto shoulder a greater share of the resource management costs, a move which canbe expected to elicit a demand on the part of ITQ holders for an increasing rolein the management of the resource.

open access fishery

The problem of overcapitalization/excess capacity in fisheriesis, perforce, an inherently economic one. Upon engaging in their work, theauthors became increasingly dissatisfied with the existing state of theeconomics of fisheries overcapitalization – the underlying nature and causes causes of over capitalisation ofovercapitalization. There appeared to be considerable confusion in theliterature, including definitions that were not wholly consistent with oneanother. This was, at first, at bit surprising, since the concept ofovercapitalization/excess capacity is well understood in other branches ofeconomics, e.g. industrial organization. Upon further investigation, thesurprise vanished as it became realised that overcapitalization in fisheries isin fact considerably more complex than that encountered in standard industrialorganization economics.

1. Thus, if one accepts the findings ofthe OECD report, then one must conclude that IQ s do constitute a major tool forthe control of capacity.
2. (i) An unsatisfactory rate of return on the equity leads to a poor market value of the company’s shares.
3. Statistical and complementary analyses of fleet and stockinteractions would allow for a segmentation of the industry in several CMUs.
4. Themanagement of fishing capacity further requires better knowledge of the labormarket (its malleability or lack thereof) and of the professional organizationsand fishermen communities which are concerned and should preferably be activelyinvolved.
5. Canada was able to bring aboutthe required reduction in fishing effort largely by evicting (over time) theDWFN fleets from its EEZ (Gordon and Munro, 1996).
6. But there is also ampleevidence that schemes such as ITQs are not readily applicable to many fisheriesand infeasible in most developing countries.
7. From the Canadianperspective, the DWFN fleet capital was highly malleable.

Undercapitalization occurs when a company does not have sufficient capital to conduct normal business operations and pay creditors. This can occur when the company is not generating enough cash flow or is unable to access forms of financing such as debt or equity. In terms of earnings, over-capitalisation arises when the earnings of the company are not sufficient to give a normal return on capital employed by it. (ii) Fair rate of return means the prevailing rate of return; which other companies in the industry- doing similar business are paying. Suppose the book value of the assets of a company is Rs. 25, 00,000 (represented by a capitalisation of 25, 00,000, consisting of equity capital, preference capital and debentures).

Scenarios 2 and 3 do, as expected, lead to less drasticreduction in yields in the short run, and to a much more gradual rebuilding ofthe resource stock (Rosenberg and Brault, 1991). The Gordon – Schaefer model, particularly when seen from theperspective of Figure 3, is very useful for illustrating the resourceexploitation consequences of pure open access. From society’s point ofview, the move towards Bionomic Equilibrium represents excessive disinvestmentin the resource. Conversely, moving from Bionomic Equilibrium to MEY requires acommitted programme of resource investment, a programme which, depending uponcircumstances, could prove to be long and painful.

It can be easily demonstrated that itshould be possible to sell these vessels to operators actual, or potential, inopen access fisheries, even though the fisheries have already achieved BionomicEquilibrium. The consequences, in terms of making a bad situation worse, are tooobvious to have to be spelled out (McKelvey, 1984; 1987). It hardly needs to be statedthat subsidies will aggravate problems of overexploitation and the building upof fleet capacity that may have to be reduced painfully in the future. Thesituation described also gives us some insights to the motivation behind atleast some subsidy programmes. Consider a situation in which the resourcemanagers are faced with gross overexploitation accompanied by fleets, andpossibly crews, highly non-malleable in nature.

What is seen as overexploitation of theresource is seen, as well, to be accompanied by overcapitalization. Like over-capitalisation, under-capitalisation also has many evil effects on the company and its owners as well as the society as a whole. In some cases, an undercapitalized corporation can leave an entrepreneur liable for business-related matters. This is more likely when corporate and personal assets are commingled when the corporation’s owners defraud creditors, and when adequate records are not kept.

As a result of over-trading, creditors will not be paid timely and the company will effect its creditworthiness adversely. Higher profits earned by the companies give a psychological feeling to the customers that they are being over-charged and hence they develop grouse towards that company. When the employees find that the company is earning high profits they press for higher wages and as a result, a tiff between the workers and employers takes place giving rise to labour unrest. Companies promoted during a period of depression often experience under-capitalisation when inflation sets in because of a sudden rise in their earnings.

Hence, thethreat to resource conservation remains as a constant (Townsend,ibid.). The purpose of TACs obviously is to block fishermen in theirattempt to overexploit the resource. The OECD argues that, if TACs areintroduced to a hitherto pure open access fishery, the TAC, if it is going to doany good, must be set below the original harvest level. The OECD predicts thatthe reduced harvest level, arising from a TACs-only policy, can be expected toforce out some of the marginal vessels, because they will not be covering all oftheir fixed costs. The “conventional” capital, both physical and human,committed to the fishery, offshore and inshore, was now highly non-malleablefrom the Canadian perspective. Initially, the Canadian government refused toreduce the Northern Cod TAC to the extent called for by the scientists, becauseof the horrendous adjustment problems which such TAC reductions, combined withthe aforementioned non-malleable capital, would entail.

This hastypically given a definite advantage to larger scale operations and led tosignificant horizontal concentration and vertical integration. In developingcountries, the small-scale sector has adjusted with mixed success to the newtrade patterns. In some countries and in relation to the relative dynamism ofprocessors and traders, growing export possibilities have constituted a definiteopportunity for this sector to develop and modernize. In others, the small-scalesector has been marginalized or relegated to supplying the less lucrative localmarket. In general, the globalisation of the market has strengthened the role ofprocessors and traders vis à vis independent fishermen. One furtherobserves that increased dependency on global markets is occurring in a contextof relatively stagnant world supply and raising prices, even if aquacultureproduction continues to rise.