FOREIGN DIRECT INVESTMENT (FDI)

FDI is one in which a foreign investor owns physical assets

abroad.

Need For Foreign Capital

When domestic capital is inadequate for purposes of eco.
growth.
When domestic and entrepreneurship may not flow to
certain lines of production.
When capital market is underdeveloped.
It brings in technical know-how and business experience
which are necessary for eco.devpt.

Different forms
Direct foreign Investment.
It means that the foreign investor invests in the capital
receiving country in the form of cash, machinery, know-how etc.
Portfolio(Indirect)Investment
It consists of the holdings of transferable securities, shares and
debentures of the capital receiving country purchased by the
foreign private individuals and institutions.They are known as
Foreign Institutional Investors (FIIs).
Inter-Govtal Loans.
This has become prevalent after the second world war.Many
developed countries provide direct intergovtal loans and grants
to many developing countries.

Equity capital:- two types1direct foreign investment

It involves the control of enterprises in which the
foreigners invest.---2Foreign portfolio management. It is
the purchase of Indian stocks by the foreigners.

Significance
1) Creation of new technology, entrepreneurial skill and
new ideasForeign firms promote the diffusion of
technological advance in an economy.It gives access to
foreign knowledge and helps to bridge the managerial
and technological gap in many developing countries.

2) Encouragement to Local Investment and Enterprise

Two forms -1.By entering into partnership with local
entrepreneurs.2.- By creating dd. for ancillary or subsidiary
products.
3) It may lead to the training of labour in skills which in turn
can be transmitted to other members of the labour force.
4) Useful for capital formation.A major portion of the profit
generated by many industries can be ploughed back for the
expansion of the existing unit or the setting up of new units.
5) Real addition to the Productive Capacity of Capital
importing country.

6)more productive.Since pvt.foreign investments

are subject to profit motives, they are likely to be
employed more productively.
7)Helpful in reducing the bop problein the early
stages of devpt. There is no repatriation
commitments since the inflow of capital takes
place in the initial stages of devpt. But when profits
are repatriated bop problems crop up.
8)Technical know-how.It enables the recipient
country to organize the resources in the most
efficient manner.

9)High standard.Pvt. foreign capital brings

with it the industrial culture of advanced
countries. The beneficial influence of foreign
capital can be seen in the foreign concerns,
in the firms working on collaboration basis
etc.
10) Marketing Facilities.Foreign
investments provide different marketing
outlets. The MNCs undertake export and
import amoung their own units located in
different countries It will help a country in
opening up its economy with the rest of the
world.

DISADVANTAGES.
1) Distort the pattern of development of the economy.
Foreign capitalists will be guided by the maximization of
profit and the priority sectors will be neglected.
2)Adverse effects on domestic savings.If pvt. foreign
investment reduces profits in domestic industries, it will
adversely affect the profit earnings and further reduce
domestic savings.
3)Adverse effect on the bop. of the recipient countries.it
happens when profits are repatriated.
4) Not useful on political grounds.It may lead to the loss
of political independence.

5) Limited coverage.Pvt. capital usually restricts itself to certain

limited spheres of economic activity.
6) Increases more dependence on foreign sources. Why?1.Uses
of foreign technology does not permit the development of
indigenous technology. 2. Foreign technology used requires import
of goods for replacement and maintenance therby creating bop
problems.
7) Foreign collaboration agreements may contain some restrictive
clauses which may be harmful to developing countries.Eg fixing
export quota.
8) Remittaance of Large amounts in the initial stages is very high
since the rate of return on initial investment is very high. It causes a
lot of hardships to the aid receiving economies.