Role of Foreign Capital

Role of Foreign Capital and Multinational companies in Industrial development of India

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.

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

1. 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).

2. 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).

3. 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.

1. 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 capital is a critical component of economic development. It can help to finance investment, create jobs, and promote economic growth. Foreign capital can take many forms, including foreign direct investment (FDI), portfolio investment, foreign aid, Remittances, and foreign exchange reserves.

FDI is the most important form of foreign capital. It occurs when a company from one country invests in a company or other asset in another country. FDI can take many forms, such as the purchase of a controlling interest in a foreign company, the establishment of a new subsidiary in a foreign country, or the acquisition of real estate in a foreign country.

FDI can have a number of positive effects on the host country. It can help to increase investment, create jobs, and promote economic growth. FDI can also help to transfer technology and skills to the host country.

However, FDI can also have some negative effects. It can lead to the loss of jobs in the host country, as foreign companies may replace local workers with their own employees. FDI can also lead to the outflow of profits from the host country, as foreign companies may repatriate their profits back to their home countries.

Portfolio investment is a type of investment that involves the purchase of financial assets, such as stocks, Bonds, and other securities. Portfolio investment can be made in both domestic and foreign markets. When investors purchase foreign assets, they are said to be investing in foreign portfolio capital.

Portfolio investment can help to promote economic growth by providing capital to businesses and governments. It can also help to diversify the risk of investors’ portfolios. However, portfolio investment can also be volatile, and it can lead to capital flight if investors become concerned about the stability of the host country.

Foreign aid is a transfer of resources from one country to another, typically in the form of grants or loans. Foreign aid can be used to support a wide range of activities, such as economic development, humanitarian assistance, and debt relief.

Foreign aid can be a valuable source of resources for developing countries. It can help to finance investment, create jobs, and promote economic growth. However, foreign aid can also be problematic. It can lead to dependency on foreign aid, and it can be used to promote the interests of the donor country rather than the interests of the recipient country.

Remittances are payments made by migrants to their families and friends in their home countries. Remittances are a major Source Of Income for many developing countries.

Remittances can help to reduce POVERTY and improve living standards in developing countries. They can also help to finance investment and promote economic growth. However, remittances can also have some negative effects. They can lead to Inflation in the host country, and they can discourage people from working in the formal economy.

Foreign exchange reserves are the assets that a country holds in foreign currencies. Foreign exchange reserves are used to support the value of a country’s currency and to finance international trade and investment.

Foreign exchange reserves can help to stabilize the value of a country’s currency. They can also help to finance imports and to pay off foreign debts. However, foreign exchange reserves can also be a source of temptation for governments. They can be used to finance wasteful spending, or they can be stolen by corrupt officials.

Debt is a sum of money that is owed by one party to another. Debt can be incurred by individuals, businesses, and governments. Foreign debt is debt that is owed to creditors in another country.

Foreign debt can be a useful tool for financing development. However, it can also be a burden. If a country borrows too much money, it may not be able to repay its debts. This can lead to economic problems, such as inflation and currency Devaluation.

In conclusion, foreign capital can be a valuable resource for developing countries. However, it is important to use foreign capital wisely. Foreign capital should be used to finance investment, create jobs, and promote economic growth. It should not be used to finance wasteful spending or to enrich corrupt officials.

Foreign capital is money that is invested in a country by people or companies from other countries. It can be used to start new businesses, expand existing businesses, or invest in infrastructure. Foreign capital can help to create jobs, boost economic growth, and improve the standard of living in a country.

Here are some frequently asked questions about foreign capital:

• What are the benefits of foreign capital?

Foreign capital can bring a number of benefits to a country, including:

• Increased investment: Foreign capital can help to increase investment in a country, which can lead to job creation and economic growth.
• Improved technology: Foreign companies often bring with them new technologies and expertise, which can help to improve the competitiveness of local businesses.
• Increased competition: Foreign companies can help to increase competition in a country, which can lead to lower prices and better products for consumers.

• Transfer of knowledge: Foreign companies can help to transfer knowledge and skills to local workers, which can help to improve the skills of the workforce.

• What are the risks of foreign capital?

Foreign capital also comes with some risks, including:

• Outflow of capital: If a foreign company decides to leave a country, it can take its capital with it, which can lead to an outflow of capital from the country.
• Loss of jobs: If a foreign company decides to lay off workers, it can lead to job losses in the country.
• Dependence on foreign companies: If a country becomes too dependent on foreign capital, it can become vulnerable to changes in the global economy.

• Loss of Sovereignty: Foreign companies may try to influence government policy in order to protect their interests.

• How can a country manage the risks of foreign capital?

There are a number of ways that a country can manage the risks of foreign capital, including:

• Investing in Human Capital: A country can invest in Education and training to improve the skills of its workforce, which can make it less vulnerable to job losses from foreign companies.
• Developing local businesses: A country can develop local businesses to compete with foreign companies, which can help to reduce the country’s dependence on foreign capital.
• Investing in infrastructure: A country can invest in infrastructure, such as roads, bridges, and airports, which can make it more attractive to foreign investors.

• Enacting laws and regulations: A country can enact laws and regulations that protect its interests and the interests of its citizens.

• What is the role of foreign capital in the global economy?

Foreign capital plays a significant role in the global economy. It is estimated that over $1 trillion of foreign capital flows into developing countries each year. Foreign capital can help to promote economic growth, create jobs, and improve the standard of living in developing countries.

• What are some examples of countries that have benefited from foreign capital?

Some examples of countries that have benefited from foreign capital include China, India, and Brazil. These countries have all attracted significant amounts of foreign capital, which has helped to promote economic growth and create jobs.

• What are some examples of countries that have been harmed by foreign capital?

Some examples of countries that have been harmed by foreign capital include Argentina and Mexico. These countries have both experienced periods of economic instability and financial crises, which have been partly caused by the outflow of foreign capital.

1. Foreign capital can help to:
   (a) Increase the level of investment in a country.
   (b) Improve the productivity of a country’s economy.
   (c) Create jobs in a country.
   (d) All of the above.

2. Foreign capital can come in the form of:
   (a) Direct investment.
   (b) Portfolio investment.
   (c) Loans.
   (d) All of the above.

3. Direct investment is when a foreign company invests in a business in another country by:
   (a) Buying Shares in the business.
   (b) Building a new factory in the country.
   (c) Buying assets of the business.
   (d) All of the above.

4. Portfolio investment is when a foreign investor buys shares in a company in another country.
   (a) True.
   (b) False.

5. Loans from Foreign Banks can help to:
   (a) Finance government spending.
   (b) Finance private investment.
   (c) Both (a) and (b).
   (d) Neither (a) nor (b).

6. Foreign capital can have both positive and negative effects on a country’s economy.
   (a) True.
   (b) False.

7. One of the positive effects of foreign capital is that it can help to increase the level of investment in a country.
   (a) True.
   (b) False.

8. One of the negative effects of foreign capital is that it can lead to a loss of control over the country’s economy.
   (a) True.
   (b) False.

9. The benefits of foreign capital are likely to outweigh the costs if the capital is used to finance productive investment.
   (a) True.
   (b) False.

10. The costs of foreign capital are likely to outweigh the benefits if the capital is used to finance unproductive investment.
    (a) True.
    (b) False.

11. The government of a country can regulate the flow of foreign capital into the country.
    (a) True.
    (b) False.

12. The government of a country can use taxes and subsidies to encourage or discourage foreign investment.
    (a) True.
    (b) False.

13. The government of a country can also use regulations to control the activities of foreign companies operating in the country.
    (a) True.
    (b) False.

14. The government of a country should carefully consider the costs and benefits of foreign capital before making decisions about whether to allow it into the country.
    (a) True.
    (b) False.

15. The government of a country should also consider the impact of foreign capital on the country’s economy, society, and Environment.
    (a) True.
    (b) False.