Renovation of Fixed Capital

Renovation of Fixed Capital


the economic process by which fixed production assets that are withdrawn as a result of obsolescence and physical wear are replaced by new assets; a necessary condition for continuity in social production.

The renovation of fixed capital may involve replacing particular means of labor that have been withdrawn; reconstructing enterprises or their subdivisions—a process that entails replacing some of the worn out fixed capital; and building new enterprises to replace those that have been dismantled. The amortization fund is the source of capital investments for the renovation of fixed capital. In the USSR part of the amortization fund is at the disposal of the enterprises (associations). It is put into the production development fund and is used primarily for renovation. The remainder of the amortization fund is distributed according to the centralized capital investment plan and is used primarily to increase the fixed capital and, to a lesser degree, to renovate it.

The necessary volume of renovation is determined by the degree of physical wear on the means of labor. In simple reproduction the volume of renovation equals the total amortization of existing fixed capital. Under expanded reproduction, the longer the service life and the higher the growth rate of fixed capital, the lower is the volume of renovation. In 1970 renovation of fixed capital in Soviet industry equaled 15 percent of the new fixed capital.

In renovation, worn out machines and equipment are usually replaced with more modern means of labor. Consequently, the efficiency of social production is increased, in connection with a reduction in the economically effective (and the corresponding standard) service life of fixed capital. Whether this possibility is used depends on the rate of technological progress in the production of new means of labor and on the correspondence between the actual and the economically effective service lives of the fixed capital.