Capital intensive refers to an endeavor or project that requires a great deal of capital to undertake. A project or business that is capital intensive often has much more risk, since a larger investment of cash or tangible assets is required. Generally, many businesses or projects that produce tangible goods require more capital than service businesses; although certain endeavors even within these businesses are more capital intensive than others.
One example of an especially capital intensive business is a business that involves drilling for oil. Huge amounts of money must be spent to undergo such a product. Land or oil rights must be purchased, and drills, rigs and other expensive equipment must be bought. This requires a large expenditure of cash.
Compare this, for example, to an individual starting a business as a project management consultant or as a freelance writer. In such a business, the individual offering the service needs little equipment and little start-up capital. He may, for example, need to buy a computer or business cards or create a website. This generally adds up to a few hundred dollars; nowhere close to what it would cost a business to engage in an oil drilling endeavor.
Often, in a capital intensive business, economies of scale exist. This means that the vast majority or bulk of the large capital investment is required simply to get the first unit of goods or to get the business off the ground. The actual cost of the project generally is reduced the more a product or units are produced.
In the oil drilling example, the large investment is the initial purchase of the land and drilling equipment. This large investment was made before the first drilling began. Once oil is struck on the piece of land, it will cost very little additional money to continue to extract the oil; the same drilling equipment and the same land is used to do so. Thus, the more of the good produced by the initial investment of capital, the lower the actual cost of the investment turns out to be.
Generally, a new business that is more capital intensive is far more risky. Since it can be difficult to know how much of a good the original heavy investment will result in producing, there is a chance the large initial investment could be lost. Thus, when investing in a start-up company or when beginning your own, the amount of capital needed to get started is an important factor to consider.
