Foreign capital plays a vital role in the industrialization and economic development of a country, as it forms one of the essential determinants of economic growth of developing countries.
Foreign
Direct Investment
Foreign capital plays a vital
role in the industrialization and economic development of a country, as it
forms one of the essential determinants of economic growth of developing
countries. Over the past two decades many countries around the world have
experienced substantial growth in their economies with even faster growth in
international transactions, especially in the form of Foreign Direct Investment
(FDI). The share of FDI in the world GDP has grown fivefold.
FDI refers to the net inflows of
investments to acquire a lasting management interest (10% or more of voting
stock) in an enterprise operating in an economy other than that of the
investor.
FDI = Equity capital + reinvestment of earnings +
short term capital + long term capital.
FDI is classified as inward FDI
and outward FDI. It can be a loan, collaboration or borrowing. The major
investors in FDI are individual, group, private and public entity.
Need For FDI In India
As India is a developing country,
capital has been one of the scarce resources that are usually required for
economic development. Capital is limited and there are many issues such as
Health, poverty, employment, education, research and development, technology
obsolesce, global competition. The flow of FDI in India from across the world
will help in acquiring the funds at cheaper cost, better technology, employment
generation, and upgraded technology transfer, scope for more trade, linkages
and spillovers to domestic firms. The following arguments are advanced in favor
of foreign capital
Sustaining a high level of
investment: As all the under-developed and
the developing countries want to industrialize and develop themselves,
therefore it becomes necessary to raise the level to investment substantially.
Due to poverty and low GDP the saving are low. Therefore there is a need to
fill the gap between income and savings through foreign direct investments.
Technological gap: In Indian scenario we need technical assistance from foreign source for
provision if expert services, training of Indian personnel and educational,
research and training institutions in the industry. It only comes through
private foreign investment or foreign collaborations.
Exploitation of natural
resources: in India we have abundant
natural resources such as coal, iron and steel but to extract the resources we
require foreign collaboration.
Understanding the initial risk: In developing countries as capital is a scare resource, the risk of
investments in new ventures or projects for industrialization is high.
Therefore foreign capital helps in these investments which require high risk.
Development of basic
infrastructure: In the recent years foreign
financial institutions and government of advanced countries have made
substantial capital available to the under developed countries. FDI will help
in developing the infrastructure by establishing firm’s different parts of the
country.
Improvement in the balance of
payments position: The inflow FDI will help in
improving the balance of payment. Firms which feel that the goods produced in
India will have a low cost, will produce the goods and export the same to other
country. This helps in increasing the exports.
Foreign firm’s helps in
increasing the competition: Foreign firms have always come
up with better technology, process, and innovations comparing with the domestic
firms. They develop a completion in which the domestic firms will perform
better it survive in the market.
Tags : Managerial Economics - Industrial Finance And Foreign Direct Investments
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