Foreign Capital

Foreign Capital: An Introduction

The governments of every country around the world look forward to attracting a sufficient amount of foreign capital as it plays a constructive role in the economic development of the country. Here, foreign capital is defined as the inflow of capital into the home country from international countries.

The reason why the need for foreign capital arises in developing countries like India is that here domestic capital proves to be inadequate for economic growth. Foreign capital is viewed as a medium using which the gap between the domestically available supply of savings, government revenue, foreign exchange, and the planned investment can be filled to achieve the country’s development targets further. 

Different Types of Gaps Filled by Foreign Capital

Here mentioned are different types of gaps that are filled by the foreign capital:

1. Foreign capital is required by the country to fill the gap between the targeted requirement of foreign exchange and those derived from the sum of the net export earnings and net public foreign aid. This is usually referred to as the foreign exchange or trade gap.

2. An inflow of private foreign capital is required by the country to remove the deficit in the balance of payments over the time being.

3. The third gap that can be filled by the foreign capital, specifically the foreign investment, is between the locally raised taxes and government tax revenue. 

Mentioning different forms of Foreign Capital

A country can receive foreign capital in three different forms- foreign investment, concessional assistance, and non-concessional assistance. 

1. Foreign Investment: There are two types of foreign investments- Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). It is the foreign investment that helps the country meet the gap in management, technology, skill, and entrepreneurship. 

2. Non-Concessional Assistance: This form of foreign capital consists of External Commercial borrowing (ECBs), deposits received from Non-Resident Indians (NRIs), and loans from the governments of international countries.

3. Concessional Assistance: This particular form of foreign capital consists of the loans and grants obtained on a bilateral basis from multilateral agencies like the International Monetary Fund (IMF), the World Bank, etc. 

All about Foreign Direct Investment in India

Foreign Direct Investment is a form of foreign investment which takes place when a company located in a foreign country takes the controlling ownership of a business established in the home country. With foreign direct investment, international companies are directly involved in the regular operations of the business established in the other nation. Foreign companies in the form of FDI do not only bring money with them but also skills, knowledge, and the latest technologies. 

Foreign Direct Investment is considered a vital monetary source for the economic development of India. Foreign companies directly invest in the fast-growing private Indian companies to avail of the benefits of cheaper wages and changing business environment of the country. Economic liberalization was started because of the 1991 economic crisis, and since then, foreign direct investment has steadily grown in the nation. 

It was on 17 April 2022 that India changed its foreign direct investment policy so that Indian companies could be protected from opportunistic acquisitions or takeovers due to the Covid-19 pandemic. The new FDI policy does not restrict the market, but the policy makes sure that all FDI will be undertaken under the scrutiny of the Ministry of Commerce and Industry. 

Stating the types of FDI

Foreign direct investment is categorized into two main types, and these are horizontal and vertical. However, the other two types of FDI emerged with time, and these are Conglomerate and platform.

• Horizontal FDI: Horizontal is the type of foreign direct investment in which a business expands its inland operation to another nation. Same activities are undertaken by the business but in an international country.

• Vertical FDI: It is a type of foreign direct investment in which a business expands into the other nation by moving to a distinct level of the supply chain. Therefore, it can be said that different activities are undertaken by the business overseas, and these activities are related to the main business. 

• Conglomerate FDI: It is a type of FDI under which unrelated activities are undertaken by the business in an international country. This is considered uncommon as it is difficult to penetrate a new country and new market. 

• Platform FDI: It is a type of FDI under which a business expands into another nation, but the output generated from the business is, in last, exported to the third nation. 

Conclusion

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. It is the foreign direct investment that majorly contributes to India’s economic development. Read the above-mentioned article to know more about foreign capital and foreign direct investment in India.