foreign capital implies funds that are raised from foreign investors for investment purposes in development projects of a host country. Any investment flowing from one country to another country is foreign investment. This concept came in 1950s when many capital deficient countries resorted to foreign capital as a primary means to achieve rapid economic growth. Foreign capital can enter the country in the form of: 1. Direct Investment
2. Indirect Investment
Also, with time the concept of foreign aid came up. It is nothing but movement of money from one country to another in the form of aid for development. It flows to developing countries in the form of loans, assistance and outright grants from various governmental and international organizations ADVANTAGES OF FOREIGN CAPITAL
1. It raises the level of investment – Brings in more industries and technology to the country and gives boost to the employment, production and economy of the host country. 2. Helps in upgradation of technology – Foreign investment brings with it the technological knowledge while transferring machinery and equipment to developing countries. 3. Exploitation of natural resources – A number of underdeveloped countries process huge mineral resources, which awaits exploitation. These countries themselves do not possess the required technical skill and expertise to accomplish this task. 4. Development of basic economic infrastructure – Underdeveloped or developing countries require a huge capital investment for development of basic economic structure as their domestic capital is often too adequate. 5. Improves export competitiveness – A foreign investment can help the host country to improve its export performance. This is because of increase in the level of efficiency and the standard of product quality. Also, better access to foreign market further improves the export competitiveness. 6. Benefits the consumers with competitive market – Consumers in developing countries stand to gain from a foreign investment through new products and improved quality of goods at competitive prices. 7. Generates revenue to the government – The profit generation by a foreign investment in the host country contributes to the corporate tax revenue in the latter. 8. Supplements domestic savings - Less developed countries lack sufficient savings, required for investment in development projects like building economic and social infrastructure. Foreign capital bridges this gap. 9. Employment increases in the host country – As foreign companies come up, they establish their plant in the host country. As a result, employment also increases. DISADVANTAGES OF FOREIGN CAPITAL
1. Countries face severe debt problems – If all the investors who have invested in the host country, pull out their money overnight then the host country comes in debt. 2. Appreciation of real exchange rate occurs – As more foreign investors invest in the country, the demand for the domestic currency rises. This causes appreciation of domestic currency and hence loss of competitiveness of exports as they become costlier. 3. Chances of inflation – Domestic supply of money increases and if this money is not utilized and absorbed in profitable projects then there is an inclination towards inflation. 4. The economy becomes overvalued – As the investors come in, the money in the economy starts flowing causing unnecessary appreciation in foreign currency. 5. Domestic market is affected – When foreign investments compete with the home investments, the profits in the domestic industries fall, thereby leading to a fall in domestic savings. 6. There is less contribution to public revenue – As the corporate taxes are comparatively less because of liberal tax concessions, investment allowances, designed public subsidies and tariff protection that are provided by the host government.
TYPES OF FOREIGN CAPITAL...
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