Role of Foreign Capital

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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.

 

 

 

  1. 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.

  1. 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.

  1. 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.

  1. 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).

  1. 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).

 

 

 

  1. 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 provide much-needed investment, technology, and expertise to developing countries. However, it is important to manage foreign capital carefully to ensure that it is used for the benefit of the country and its people.

There are a number of different types of foreign capital, including foreign direct investment (FDI), portfolio investment, foreign aid, Remittances, and foreign exchange reserves.

FDI is the investment made by a company or individual in one country into business ventures in another country. FDI can take many forms, including the establishment of new businesses, the acquisition of existing businesses, and the purchase of real estate. FDI can be a major driver of economic growth, as it can bring new technologies, jobs, and skills to a country.

Portfolio investment is the purchase of financial assets, such as stocks and Bonds, in another country. Portfolio investment is often used by investors to diversify their portfolios and to gain exposure to different markets. Portfolio investment can also be a source of capital for developing countries, but it is important to ensure that it is not used to speculate on the country’s currency or stock market.

Foreign aid is the transfer of financial resources from one country to another, usually in the form of grants or loans. Foreign aid can be used to support economic development, to promote Human Rights, or to address humanitarian crises. Foreign aid can be a valuable source of resources for developing countries, but it is important to ensure that it is used effectively and that it does not create dependency.

Remittances are the money that migrants send to their families and friends in their home countries. Remittances can play a significant role in the economies of developing countries, providing much-needed foreign exchange and supporting local businesses. Remittances can also help to reduce POVERTY and improve living standards in developing countries.

Foreign exchange reserves are the stocks of foreign currencies that a country’s central bank holds. Foreign exchange reserves are used to support the value of the country’s currency, to pay for imports, and to meet other international obligations. Foreign exchange reserves can help to stabilize the economy and to protect the country from financial shocks.

Debt is the money that a country owes to its creditors. Debt can be used to finance economic development, but it can also become a burden if it is not managed carefully. Too much debt can lead to high interest payments, which can crowd out other spending and investment. Debt can also make it difficult for a country to respond to economic shocks.

It is important to manage foreign capital carefully to ensure that it is used for the benefit of the country and its people. Foreign capital can be a powerful tool for development, but it can also be a source of problems if it is not managed properly. It is important to ensure that foreign capital is used to finance productive investments, that it does not lead to excessive debt, and that it does not benefit only a small elite.

There are a number of things that developing countries can do to manage foreign capital effectively. First, they need to develop Sound macroeconomic policies, such as low Inflation and a stable exchange rate. Second, they need to invest in Human Capital, such as Education and healthcare. Third, they need to improve the investment Climate, such as by reducing Corruption and improving the Rule of Law. Fourth, they need to diversify their economies, so that they are not dependent on a single industry or export. Fifth, they need to build up their foreign exchange reserves, so that they can withstand economic shocks.

Foreign capital can be a powerful tool for development, but it is important to manage it carefully. By following the steps outlined above, developing countries can maximize the benefits of foreign capital and minimize the risks.

What is foreign capital?

Foreign capital is money that is invested in a country by people or companies from another country. It can be used to start new businesses, expand existing businesses, or invest in real estate or other assets.

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.
  • Technology transfer: Foreign companies often bring with them new technologies and know-how, which can help to improve the competitiveness of local businesses.
  • Access to new markets: Foreign capital can help businesses to access new markets, both in the country where the investment is made and in other countries.
  • Increased competition: Foreign investment can help to increase competition in a country, which can lead to lower prices and better quality goods and services for consumers.

What are the risks of foreign capital?

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

  • Outflow of capital: If the economy of the country where the investment is made takes a turn for the worse, foreign investors may decide to pull their money out of the country, which can lead to an outflow of capital and a decline in the value of the local currency.
  • Dependence on foreign capital: If a country becomes too dependent on foreign capital, it can be vulnerable to changes in the global economy. For example, if a major foreign investor decides to pull out of the country, it can have a significant negative impact on the local economy.
  • Loss of control: Foreign investors may have a significant amount of control over the businesses in which they invest. This can lead to a loss of control for the Local Government and a loss of jobs for local workers.

What are the regulations on foreign capital?

Most countries have regulations in place to control the flow of foreign capital into and out of the country. These regulations are designed to protect the interests of the country and its citizens.

The regulations on foreign capital can vary from country to country. In some countries, there are no restrictions on foreign investment. In other countries, there are strict restrictions on the types of investments that foreign companies can make.

The regulations on foreign capital are often designed to protect the local economy from the negative effects of foreign investment. For example, some countries have regulations that require foreign companies to invest a certain amount of money in the local economy or to hire a certain number of local workers.

What are the trends in foreign capital?

The flow of foreign capital has been increasing in recent years. This is due to a number of factors, including:

  • The globalization of the economy: The global economy has become increasingly interconnected, which has made it easier for businesses to invest in other countries.
  • The decline of trade barriers: Trade barriers have been declining in recent years, which has made it easier for businesses to export and import goods and services.
  • The rise of emerging markets: Emerging markets have become increasingly attractive to foreign investors in recent years. This is due to the high growth rates and low labor costs in these markets.

The trend of increasing foreign capital is likely to continue in the future. This is due to the factors mentioned above, as well as the increasing integration of the global economy.

Question 1

Foreign direct investment (FDI) is a type of investment that involves a company or individual from one country investing in a company or business in another country. FDI can take many forms, such as the purchase of Shares in a company, the establishment of a new subsidiary, or the acquisition of assets.

Which of the following is not a benefit of FDI?

(A) Increased competition
(B) Transfer of technology
(C) Job creation
(D) Increased exports

Answer

(D) Increased exports. FDI does not necessarily lead to increased exports. In fact, FDI can sometimes lead to decreased exports if the foreign company replaces domestic production with imports.

Question 2

Which of the following is a risk associated with FDI?

(A) Political instability
(B) Currency fluctuations
(C) Repatriation of profits
(D) All of the above

Answer

(D) All of the above. FDI is a risky investment, as there are many factors that can affect the success of an investment, such as political instability, currency fluctuations, and the possibility that the foreign company may repatriate its profits.

Question 3

Which of the following is a way to mitigate the risks associated with FDI?

(A) Use of joint ventures
(B) Use of local partners
(C) Use of hedging strategies
(D) All of the above

Answer

(D) All of the above. There are a number of ways to mitigate the risks associated with FDI, such as using joint ventures, using local partners, and using hedging strategies.

Question 4

Which of the following is a factor that can affect the success of an FDI project?

(A) The political Environment in the host country
(B) The economic environment in the host country
(C) The regulatory environment in the host country
(D) All of the above

Answer

(D) All of the above. The success of an FDI project can be affected by a number of factors, such as the political environment, the economic environment, and the regulatory environment in the host country.

Question 5

Which of the following is a reason why a company might choose to invest in a foreign country?

(A) To access new markets
(B) To obtain raw materials
(C) To reduce costs
(D) All of the above

Answer

(D) All of the above. There are a number of reasons why a company might choose to invest in a foreign country, such as to access new markets, to obtain raw materials, or to reduce costs.

Question 6

Which of the following is a benefit of investing in a foreign country?

(A) Access to new markets
(B) Access to low-cost labor
(C) Access to new technologies
(D) All of the above

Answer

(D) All of the above. There are a number of benefits of investing in a foreign country, such as access to new markets, access to low-cost labor, and access to new technologies.

Question 7

Which of the following is a risk associated with investing in a foreign country?

(A) Political instability
(B) Currency fluctuations
(C) Repatriation of profits
(D) All of the above

Answer

(D) All of the above. Investing in a foreign country is a risky proposition, as there are a number of factors that can affect the success of an investment, such as political instability, currency fluctuations, and the possibility that the foreign company may repatriate its profits.

Question 8

Which of the following is a way to mitigate the risks associated with investing in a foreign country?

(A) Use of joint ventures
(B) Use of local partners
(C) Use of hedging strategies
(D) All of the above

Answer

(D) All of the above. There are a number of ways to mitigate the risks associated with investing in a foreign country, such as using joint ventures, using local partners, and using hedging strategies.

Question 9

Which of the following is a factor that can affect the success of an FDI project?

(A) The political environment in the host country
(B) The economic environment in the host country
(C) The regulatory environment in the host country
(D) All of the above

Answer

(D) All of the above. The success of an FDI project can be affected by a number of factors, such as the political environment, the economic environment, and the regulatory environment in

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