<–2/”>a >The development of any Society or country without Economic Development is a myth. Economic development brings prosperity which in turns is directly proportional to the amount of goods and Services produced quantitatively or in broad sense we can say in Money equivalent.
So the factor of production depends on the following parameters.
- Land
- Labour
- Capital
For a country like India which is the second largest populous country in the world, expected to become most populous by 2050 if Population Growth is continuing at the current pace, where labour is available in abundance. Similarly, land is also available where more economic prosperity can be brought than the currently pursued economic activity. So after considering all these factors, capital played a crucial role.
So to fulfill the aspirations of common masses and general wellbeing of the society various governments are competing against each other to attract the foreign capital.
This theory is particularly gained ground after the Latin American crises which resulted in the Washington Consensus/Washington model. This is further ascertained by East Asian miracle. India has also experienced the taste of after Economic Reforms of 1991, which is better known as LPG Reforms. However from the experience of various countries various model of foreign capital and model have emerged. It also requires some kind of reduction regulation and restraint.
Why there is a need of foreign capital?
Foreign capital is required because of following reasons.
- Inadequate domestic capital to fuel the economic growth.
Foreign capital is perceived as a resource of filling the gap of the capital scarce country. It helps in maintaining the Foreign Exchange, accelerating government revenue, planning the Investment necessary to achieve development target.
For example ‘Savings-investment’ gap
To achieve a planned growth rate of 7 percent per annum and the capital-output ration of 3 percent, rate of saving should be 21 percent. For domestic mobilization of 16 percent, there will be a shortfall of 5 percent. Thus the foremost contribution of foreign capital to national development is its role in filling the resource gap between targeted investment and locally mobilized savings.
- Stability of Foreign exchange.
Foreign capital is needed to fill the gap between the targeted foreign exchange requirements and those derived from net export earnings plus net public foreign aid. This is generally called the foreign exchange or trade gap.
- Reducing the Balance of Payment deficit.
An inflow of private foreign capital helps in removing deficit in the Balance of Payments over time if the foreign-owned enterprise can generate a net positive flow of export earnings.
- Helps in realizing the estimated tax revenue of government
The third gap that the foreign capital and specifically, foreign investment helps to fill is that between governmental tax revenue and the locally raised taxes. By taxing the profits of the foreign enterprises the governments of developing countries are able to mobilize funds for projects (like energy, Infrastructure-2/”>INFRASTRUCTURE) that are badly needed for economic development.
- Foreign investment meets the gap in management, Entrepreneurship, technology and skill.
These can be transferred to the host country through suitable training programmes and the processes. Further foreign companies bring with them sophisticated technological knowledge about production processes while transferring modern machinery equipment to the capital-poor developing countries.
In fact, in this era of Globalization/”>Globalization-3/”>Globalization, there is a general belief that foreign capital transforms the productive structures of the developing economics leading to high rates of growth. Besides the above, foreign capital, by creating new productive assets, contributes to the generation of EMPLOYMENT a prime need of a country like India.
Forms and types of foreign Capital
Foreign capital flow in a country can take place either in the form of investment, concessional assistance, foreign aid.
- Foreign Investment includes Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) / Foreign Institutional Investment (FII).
FPI includes the amounts raised by Indian corporate through Euro Equities, Global Depository Receipts (GDR’s), and American Depository Receipts (ADR’s).
- Non-Concessional Assistance mainly includes External Commercial Borrowings (ECB’s), loans from governments of other countries/multilateral agencies on market terms and deposits obtained from Non-Resident Indians (NRIs).
- Concessional Assistance includes grants and loans obtained at low rates of interest with long maturity periods. Such assistance is generally provided on a bilateral basis or through multilateral agencies like the World Bank, International Monetary Fund (IMF), and International Development Association (IDA) etc.
Grants do not carry any obligation of repayment and are mostly made available to meet some temporary crisis. Foreign Aid can also be received in terms of direct supplies of agricultural commodities or industrial raw materials to overcome temporary shortages in the economy. Foreign Aid may also be given in the form of technical assistance.
Role of Multinational Corporations in the Indian Economy
Prior to 1991 Multinational companies did not play much role in the Indian economy. In the pre-reform period the Indian economy was dominated by public enterprises.
Earlier Industries and firms are regulated through Industrial Policy, 1956 put some kind of restraint on private firms, as a consequence of which they didn’t able to expand beyond a limit.
While multinational companies played a significant role in the promotion of growth and trade in South-East Asian countries they did not play much role in the Indian economy where import-substitution development strategy was followed. Since 1991, with the adoption of industrial policy of Liberalization-2/”>Liberalization, Privatization
And globalization role of private foreign capital has been recognized as important for rapid growth of the Indian economy. So Multinational corporations have been allowed to operate in India subjected to some regulations.
Impact of Multinational countries on the country and general population.
- Promotion Foreign Investment:
In the recent years, external assistance to developing countries has been declining. This is because the donor developed countries have not been willing to part with a
larger proportion of their GDP as assistance to developing countries. MNCs can bridge the gap between the requirements of foreign capital for increasing foreign investment in India.
The liberalized foreign investment pursued since 1991, allows MNCs to make investment in India subject to different ceilings fixed for different industries or projects. However, in some industries 100 per cent export-oriented units (EOUs) can be set up. It may be noted, like domestic investment, foreign investment has also a multiplier effect on income and employment in a country.
For example, the effect of Suzuki firm’s investment in Maruti Udyog manufacturing cars is not confined to income and employment for the workers and employees of Maruti Udyog but goes beyond that. Many workers are employed in dealer firms who sell Maruti cars.
Moreover, many Intermediate Goods are supplied by Indian suppliers to Maruti Udyog and for this many workers are employed by them to manufacture various parts and components used in Maruti cars. Thus their incomes also go up by investment by a Japanese multinational in Maruti Udyog Limited in India.
2. Non-Debt Creating Capital inflows:
In pre-reform period in India when foreign direct investment by MNCs was discouraged, we relied heavily on External Commercial Borrowing (ECB) which was of debt-creating capital inflows. This raised the burden of External Debt and debt service payments reached an alarming figure of our Current Account receipts.
This created doubts about our ability to fulfill our debt obligations and there was a flight of capital from
India and this resulted in balance of payments crisis in 1991. As direct foreign investment by multinational corporations represents non-debt creating capital inflows we can avoid the liability of debt-servicing payments. Moreover, the advantage of investment by MNCs lies in the fact that servicing of non-debt capital begins only when the MNC firm reaches the stage of making profits to repatriate Thus, MNCs can play an important role in reducing Stress strains and on India’s balance of payments (BOP).
3. Technology Transfer:
Another important role of multinational corporations is that they transfer sophisticated technology to developing countries which are essential for raising productivity of working class and enable us to start new productive ventures requiring high technology. Whenever, multinational firms set up their subsidiary production units or joint-venture units, they not only import new equipment and machinery embodying new technology but also skills and technical know-how to use the new equipment and machinery.
As a result, the Indian workers and engineers come to know of new superior technology and the way to use it. In India, the corporate sector spends only few Resources on Research and Development (R&D). It is the giant multinational
corporate firms (MNCs) which spend a lot on the development of new technologies can greatly benefit the developing countries by transferring the new technology developed by them. Therefore, MNCs can play an important role in the technological up-gradation of the Indian economy.
4. Promotion of Exports:
With globalization and producing products efficiently and therefore with lower costs multinationals can play a significant role in promoting exports of a country in which they invest. For example, the rapid expansion in China’s exports in recent years is due to the large investment made by multinationals in various fields of Chinese Industry.
Historically in India, multinationals made large investment in plantations whose products they exported. In recent years, Vistara airlines made a large investment in airline industries with a joint collaboration with Tata Industries.
BrahMos missile is a joint venture of Govt. of India with Russia, which is being sold to Vietnam, will bring income to India.
As a matter of fact until recently, when giving permission to a multinational firm for investment in India, Government granted the permission subject to the condition that the concerned multinational company would export the product so as to earn foreign exchange for India.
However, in case of Pepsi, a famous cold -drink multinational company, while for getting a product license in 1961 to produce Pepsi Cola in India it agreed to export a certain proportion of its product, but later it expressed its inability to do so. Instead, it ultimately agreed to export things other than what it produced such as tea.
5. Investment in Infrastructure:
With a large command over financial resources and their superior ability to raise resources both globally and inside India it is said that multinational corporations could invest in infrastructure such as power projects, modernization of Airports and posts, Telecommunication.
The investment in infrastructure will give a boost to industrial growth and help in creating income and employment in the India economy. The external economies generated by investment in infrastructure by MNCs will therefore crowd in investment by the indigenous private sector and will therefore stimulate economic growth.
In view of above, Make in India initiative, Skill India Initiative, current demographic scenario of India, foreign direct investment (FDI) will be encouraged and actively sought, especially in areas of (a) infrastructure, (b) high technology and (c) exports, and (d) where domestic assets and employment are created on a significant scale
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Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI) are two types of foreign investment. FII is investment made by institutional investors, such as Mutual Funds and pension funds, in the stock markets of another country. FDI is investment made by a company in another country to establish a business or acquire an existing business.
FII and FDI can bring a number of benefits to a country, including:
- Increased liquidity in the stock market: FII can help to increase liquidity in the stock market by providing a source of demand for Shares. This can make it easier for companies to raise capital and can also help to stabilize stock prices.
- Increased foreign exchange reserves: FII can help to increase a country’s foreign exchange reserves by providing a source of foreign currency. This can be helpful in times of economic difficulty, when a country may need to import more goods and services than it exports.
- Increased competition in the market: FII can help to increase competition in the market by bringing in new companies with new products and services. This can lead to lower prices and better quality goods and services for consumers.
- Increased access to technology and expertise: FII can help to increase a country’s access to technology and expertise by bringing in foreign companies with new technologies and management skills. This can help to improve the productivity of domestic companies and can also help to attract more FDI.
However, FII and FDI also come with some risks, including:
- Volatility in the stock market: FII can lead to volatility in the stock market, as institutional investors may buy and sell shares quickly in response to changes in market conditions. This can make it difficult for companies to raise capital and can also lead to sharp fluctuations in stock prices.
- Currency fluctuations: FII can also lead to currency fluctuations, as institutional investors may buy and sell currencies in response to changes in market conditions. This can make it difficult for businesses to plan for the future and can also lead to exchange rate risk.
- Political instability: FII can be sensitive to political instability, as institutional investors may be reluctant to invest in countries with unstable governments. This can make it difficult for countries to attract FDI and can also lead to capital flight.
- Economic slowdown: FII can also be sensitive to economic slowdowns, as institutional investors may be reluctant to invest in countries with slowing economies. This can make it difficult for countries to attract FDI and can also lead to capital flight.
Despite the risks, FII and FDI can be a valuable source of capital and technology for developing countries. Countries can attract more FII and FDI by:
- Maintaining macroeconomic stability: Countries should maintain macroeconomic stability by keeping Inflation low and the exchange rate stable. This will help to attract foreign investors who are looking for a safe and predictable investment Environment.
- Improving the investment Climate: Countries should improve the investment climate by reducing red tape and Corruption. They should also invest in infrastructure and Education to create a more attractive environment for foreign investors.
- Promoting trade and investment liberalization: Countries should promote trade and investment liberalization by reducing tariffs and other barriers to trade. This will make it easier for foreign companies to do business in the country.
- Providing incentives for FDI: Countries can provide incentives for FDI, such as tax breaks or subsidies. This can help to attract foreign companies that are looking for a competitive advantage.
FII and FDI can play a vital role in the development of a country’s economy. By attracting foreign capital and technology, countries can boost their economic growth and improve the lives of their citizens.
What is Foreign Direct Investment (FDI)?
Foreign direct investment (FDI) is an investment made by a company or individual in one country into business interests located in another country. The main difference between FDI and other types of investment, such as portfolio investment, is that FDI involves a lasting interest in and control over the enterprise.
What are the benefits of FDI?
FDI can bring a number of benefits to both the host country and the home country of the investor. For the host country, FDI can provide capital, technology, and management skills that can help to promote economic growth. FDI can also create jobs and increase exports. For the home country of the investor, FDI can help to increase profits and create jobs.
What are the risks of FDI?
There are a number of risks associated with FDI, including political risk, economic risk, and currency risk. Political risk refers to the risk that the government of the host country may change its policies in a way that is unfavorable to foreign investors. Economic risk refers to the risk that the economy of the host country may decline, which could lead to a decrease in the value of the investment. Currency risk refers to the risk that the value of the currency of the host country may decline relative to the currency of the home country of the investor, which could lead to a loss on the investment.
What are the regulations governing FDI?
The regulations governing FDI vary from country to country. In some countries, there are few restrictions on FDI, while in other countries, there are strict regulations that must be followed. The regulations typically cover issues such as the type of investment that is allowed, the amount of investment that is allowed, and the ownership structure of the investment.
What are the trends in FDI?
The global trend in FDI has been increasing in recent years. In 2017, the total value of FDI flows was over $1.7 trillion. The main drivers of this growth have been the increasing globalization of the economy, the liberalization of trade and investment policies, and the rise of emerging markets.
What are the challenges facing FDI?
There are a number of challenges facing FDI, including the global financial crisis, the rise of protectionism, and the increasing risk of political instability. The global financial crisis has led to a decline in FDI flows, as investors have become more risk-averse. The rise of protectionism has led to increased barriers to trade and investment, which has made it more difficult for foreign companies to invest in host countries. The increasing risk of political instability has made investors more cautious about investing in countries where there is a risk of civil unrest or war.
What is the future of FDI?
The future of FDI is uncertain. The global financial crisis, the rise of protectionism, and the increasing risk of political instability are all factors that could lead to a decline in FDI flows. However, the increasing globalization of the economy and the liberalization of trade and investment policies are factors that could lead to an increase in FDI flows.
Question 1
Foreign direct investment (FDI) is a type of investment that occurs when a company invests in a foreign country. This can be done by setting up a new subsidiary or by acquiring an existing company. FDI can help to improve the efficiency of a country’s economy by bringing in new technology and management skills. It can also help to create jobs and boost exports.
Which of the following is not a benefit of FDI?
(A) Increased efficiency
(B) Increased competition
(C) Increased innovation
(D) Increased Unemployment
Answer
(D) Increased unemployment
FDI can lead to increased employment, as companies that invest in a foreign country often need to hire local workers. However, it is also possible that FDI could lead to job losses, if the company that invests in a foreign country decides to replace existing workers with cheaper labor.
Question 2
Foreign institutional investment (FII) is a type of investment that is made by institutional investors, such as pension funds, mutual funds, and Hedge Funds. FII can be made in a variety of ways, including through the purchase of shares on Stock Exchanges, the purchase of Bonds, and the lending of money to companies.
Which of the following is not a benefit of FII?
(A) Increased liquidity
(B) Increased transparency
(C) Increased volatility
(D) Increased efficiency
Answer
(C) Increased volatility
FII can help to increase liquidity in a market, as institutional investors are often large and can buy and sell large amounts of securities. This can make it easier for other investors to buy and sell securities, and can help to keep prices stable. However, FII can also lead to increased volatility, as institutional investors may be more likely to sell securities if they believe that the market is going to decline.
Question 3
Which of the following is not a factor that can affect the amount of FDI that a country receives?
(A) The country’s political stability
(B) The country’s economic growth rate
(C) The country’s tax rates
(D) The country’s labor costs
Answer
(D) The country’s labor costs
The cost of labor is a factor that can affect the profitability of a company that invests in a foreign country. However, it is not the only factor that can affect the amount of FDI that a country receives. Other factors, such as the country’s political stability, economic growth rate, and tax rates, can also play a role.
Question 4
Which of the following is not a factor that can affect the amount of FII that a country receives?
(A) The country’s stock market liquidity
(B) The country’s economic growth rate
(C) The country’s inflation rate
(D) The country’s currency exchange rate
Answer
(B) The country’s economic growth rate
The economic growth rate is a factor that can affect the profitability of a company that invests in a foreign country. However, it is not the only factor that can affect the amount of FII that a country receives. Other factors, such as the country’s stock market liquidity, inflation rate, and currency exchange rate, can also play a role.
Question 5
Which of the following is not a way that a country can attract more FDI?
(A) Reducing taxes
(B) Deregulating the economy
(C) Investing in infrastructure
(D) Increasing the cost of labor
Answer
(D) Increasing the cost of labor
The cost of labor is a factor that can affect the profitability of a company that invests in a foreign country. However, reducing the cost of labor is not the only way that a country can attract more FDI. Other ways to attract more FDI include reducing taxes, deregulating the economy, and investing in infrastructure.