Private Foreign Investment

Topics: Investment, Economics, Capital accumulation Pages: 2 (538 words) Published: November 13, 2008
Private foreign Investment

Private foreign capital, whose presence in Indian industry was long regarded with concern and suspicion, is now touted as a panacea for India’s economic problems. This paper compares the relative performance of domestic and foreign-controlled firms in India, and evaluates the contribution of foreign investment over the last five decades. We assess the impact of government policy towards foreign capital, and outline policy implications for the future.


The 1990s have seen a marked increase in private capital flows to India, a trend that represents a clear break from the two decades before that. In the 1970s there was hardly any new foreign investment in India: indeed, some firms left the country. Inflows of private capital remained meagre in the 1980s: they averaged less than $0.2 billion per year from 1985 to 1990. In the 1990s, as part of wideranging liberalisation of the economy, fresh foreign investment was invited in a range of industries. Inflows to India rose steadily through the 1990s, exceeding $6 billion in 1996-97. The fresh inflows were primarily as portfolio capital in the early years (that is, diversified equity holdings not associated with managerial control), but increasingly, they have come as foreign direct investment (equity investment associated with managerial control). Though dampened by global financial crises after 1997, net direct investment flows to India remain positive.

India was not unique as a recipient of increased inflows in the 1990s. International flows of private capital to most developing countries rose sharply over this period. The historically low interest rates in the US encouraged global investment funds to diversify their portfolios by investing in emerging markets. International flows of direct investment, which had averaged $142 billion per year over 1985-90, more than doubled to $350 billion in 1996, with the developing countries receiving $130 billion. Host country...
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