FOREIGN CAPITAL AND

ECONOMIC
DEVELOPMENT
INTRODUCTION
• Foreign capital refers to the inflow of capital into the home country
through international nations either in the form of foreign investment
(FDI or FPI), loans from multilateral agencies, including the World
Bank, or loans from the governments of international countries.
Foreign capital may inflow to the home
country through
• Foreign Aid
• Private Foreign Investment
• Foreign Investment
Role of Foreign Capital in Economic
Development
• Increases in resources and job opportunities
• Risk taking
• Development of backward areas
• Provision of technical know how along with finance
• Increases export and reduces trade deficit
• Exchange rate stability
• Increases competition
• Marketing facilities
• Stumulation of economic development
TYPES OF FOREIGN CAPITAL
• A) Foreign Direct Investment
• B) Foreign Institutional Investment (FII) or Foreign Portfolio
Investment (FPI)  
• Types of FDI
• Horizontal FDI :  In this case funds are invested in foreign
company belonging to the same industry.
• Vertical FDI : It occurs when an investment is made within a
typical supply chain in a company, but not directly in the same
industry. Eg. Hershey may invest in cocoa producers.
• Conglomerate FDI : Conglomerate FDI is where an investment is made
in a completely different industry. In other words, it is not linked in
any direct way to the investors business. For instance, Walmart, a US
retailer, may invest in BMW, a German automobile manufacturer.
• Platform FDI : a business expands into a foreign country but the
output from the foreign operations is exported to a third country. This
is also referred to as export-platform FDI. Platform FDI commonly
happens in low-cost locations inside free-trade areas.
• For example, a clothing brand based in North America may outsource
their manufacturing process to a developing country in Asia, and sell
the finished goods in Europe. Thus the expansion occurs in one
foreign country, and the output is carried on to a different foreign
country.
• Besides these types some more types of FDI
• Greenfield Investment : a type of foreign direct investment (FDI) in
which a parent company creates a subsidiary in a different country,
building its operations from the ground up.
• Brownfield Investment : when a company or government entity
purchases or leases existing production facilities to launch a new
production activity. This is one strategy used in foreign direct
investment.
Advantages of FDI 
• Economic growth and increase in employment
• Boosts a nation's economic growth and development.
• Creates ease in international trade.
• Facilitates job creation.
• Drives human capital development.
• It helps provide tax incentives.
• Assists in the transfer of skilled resource.
Disadvantages of FDI
• Hindrance of domestic investment. FDI creates a good level of
competition between domestic and foreign organisations.
• The risk from political changes.
• Inflation and Exchange crises
• Economic non-viability
• Poor performance.
• Trade Deficit.
• Increase in Pollution.
• B) Foreign Institutional Investment (FII) or Foreign Portfolio
Investment (FPI)  
•  an investor or investment fund investing in a country outside of the one
in which it is registered or headquartered. The term foreign
institutional investor is probably most commonly used in India, where it
refers to outside entities investing in the nation's financial markets.
• These investors usually include hedge funds, mutual funds,
insurance companies and investment banks among others. FIIs generally
hold equity positions in foreign financial markets. Due to this, the
companies invested in by FIIs generally have improved capital structures
due to healthy inflow of funds
Advantages of Foreign Institutional
Investment (FII)
• Enhances flows of equity capital into the domestic economy
• Enhances competition
• Helps in improving efficiency of financial market
• Financial innovation
• Improvement in capital structure
• Equity market development aids in economic development
• Better understanding of firms operations
disdvantages of Foreign
Institutional Investment (FII)
• Problem of inflation
• FII may be withdrawn at any time
• Problem for small investors
• Adverse impact on exports
LIMITATIONS OF FOREIGN CAPITAL
• Risk from Political Changes. •Restrictive conditions on exports
• Negative Influence on Exchange Rates. and production​
•Adverse balance of paymets of
• Higher Costs.
the recipient country​
• Economic Non-Viability.
•Foreignn capitla may be
• Planned economy becomes distorted
politically motivated​
• More dependence 
•Limited coverage
• Remittance of large amounts 
• Problem for cottage of Business sectors​
•​
and small scale industries  
• Contribution to the pollution