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

(c) There will be little change in the current leaders in world trade. Notes
(d) The adoption of liberal economic policies will likely continue everywhere throughout
the world because of their undeniable success.
(vi) Which of the following is NOT true about employment and income in the face of continuing
globalization:
(a) The wage gap between developed and developing nations is closing.
(b) Recent evidence suggests that technological change had has a bigger impact on
globalization on the declining share of national income enjoyed by labor.
(c) Real labor compensation has declined in most developed nations since the 1980s,
including for the U.S.
(d) The solution to stagnant incomes among the unskilled is not in limiting free trade but
increasing society's investment in education to reduce the supply of unskilled workers.
23.5 Summary

• 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.
• There are two structural constraints in a developing economy a minimum requirement of inputs
to sustain a given rate of growth of GNP; and an actual or potential ceiling on export earnings.
• Foreign aid and private investment are two types of inflows of capital from abroad. Loans and
grants from Foreign Governments and Institutions are included in the foreign aid. Since these
may have repayment obligations, this source of foreign capital, especially loans, has a limitation.
• There are two types of foreign private equity capital flows : (1) portfolio investment (an investor
holds shares in a firms in a developing country but is not involved in its management) and (2)
foreign direct investment.
• The Foreign Direct Investment (FDI) in any country abroad is the net inflow of investment
(capital or other), in order to acquire management control and profit sharing (10% or more
voting stock) or the whole ownership of an accredited company operating in the country
receiving investment.
• The foreign direct investment is profitable both to the country receiving investment (foreign
capital and funds) and the investor. For the investor company FDI offers an exclusive opportunity
to enter into the international or global business, new markets and marketing channels, elusive
access to new technology and expertise, expansion of company with new or more products or
services, and cheaper production facilities.
• MNCs are involved in foreign direct investment which means they own or control income
generation assets in more than one country. Thus, they produce goods or services outside its
country of origin. There are more than eleven thousand MNCs with more than eighty-two
thousand subsidiaries in operation in today’s world economy.
• Foreign capital has been given an important role to play in the planned economy of India. In
the first stage, foreign capital was looked upon as a means to supplement domestic investment
but gradually the emphasis shifted to encouraging technological collaboration between Indian
entrepreneurs and foreign entrepreneurs.
• ln India, foreign investment is subject to the same industrial policy as all other business ventures.
Moreover, there are some additional policies and rules specially governing foreign collaboration.
• The foreign investment environment in India has been improved by the economic reforms and
the success of the new economic policy depends in a large measure on the liberal response of
the foreign capital.

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