Page 299 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 23: Role of Foreign Capital - FDI and Multinational Corporations
Hitesh Jhanji, Lovely Professional University

Unit 23: Role of Foreign Capital - FDI and Notes
Multinational Corporations

CONTENTS
Objective
Introduction
23.1 Role of Foreign Capital - FDI
23.2 Types of Foreign Capital
23.3 Multinational Corporations
23.4 Critical Evaluation of the New Policy
23.5 Summary
23.6 Key-Words
23.7 Review Questions
23.8 Further Readings

Objectives

After reading this Unit students will be able to:
• Explain the Role of Foreign Capital-FDI .
• Discuss Multinational Corporations.
Introduction

The role of multinational companies for enterprise and capital in the economies of the world has
hugely increased with the spread of information technology and recent technological advances. It is
more important to understand for a developing Economy because here they are needed to fill
investment saving gap; technology gap, and foreign exchange gap. This must be regulated. Form
July, 1991, a large number of high-tech areas have been left open to foreign investment. In India’s
context, the response of foreign capital to policy initiatives can only be called a mixed one. It is true
there are many proposals and even many approvals but the actual inflows have been limited. Here,
the various issues involved in the foreign capital and role of MNCs in this regard is to be discussed.
This would provide an understanding about the changing scenario in the economy of the country.
23.1 Role of Foreign Capital - FDI

The foreign capital contributes to gap-filling in an economy. Savings gap, Trade gap and Technology
gap are three gaps that can be filled by foreign capital. This would create conditions suitable for fast
economic growth. Thus, inflow of capital from abroad is vital for the growth of a developing economy,
especially in the initial stages.
Savings Gap : Raising the rate of capital formation is the key to the development. This needs a much
higher level of investment than is warranted by the present level of savings in a developing economy.
The prevailing low level of income, slow rates of growth and rising consumption needs in these
economies limit the scope for a sharp rise in domestic savings. Thus, foreign capital can be used to fill
the gap between investment requirements and domestic savings. It may be noted that the availability
of foreign capital increases the availability of total resources in the economy. The increase in resources,
in turn, influences investment decisions and makes possible construction of many new projects.
Moreover, establishment of bigger projects and projects with a high investment component open up
new opportunities of investment.

LOVELY PROFESSIONAL UNIVERSITY 293