The importance of aurei capital in accelerating economic development is undoubted. But which are the main sources of foreign capital? In the 19th and the early 20th centuries, most of the foreign capital which went to develop the resources of the developing countries was private capital investment either of the equity type or the portfolio variety. In more recent times. though private foreign capital continues to be invested largely in primary production for the purpose of export to the investing countries, yet, in its size, it has been far eclipsed by the flow of capital either on government -to-government level or through borrowing from international financial institutions like the International Bank for Reconstruction and Development (known as the World Bank) and its affiliate the International Development Association, In India’s five-year plans, fur example, a great deal of reliance has been placed on government-to government long-term borrowing (through the Aid- India Club comprising several capital-rich countries) and on loans from the World Bank.
This means buying of shares by the entrepreneurs or firms of one country in firms of another country. It involves foreign control of the firm in which investment is made.Profits in the firms or companies of the receiving country by the foreign capitalists is also called direct investment. Private foreign capital also takes the fond of loans which is called portfolio investment as distinguished from direct investment. In portfolio investment, capital is transferred from one country to another through the purchase of bond; and debentures of a firm or company in the non owing country.
Trends in the Flow or Foreign Capital. Before the First World War. there was tremendous flow of foreign capital to the needy countries form the rich countries like the U.K., Germany and France owing to the need for securing key raw materials from abroad, the lure of fabulous profits and owing to the legal and economic advantages enjoyed by the owners of capital. However. Luring the inter-war period. the outflow declined considerably on account of the unsettled political and economic conditions and the Great Depression of the early 1930’s which created balance of paymaster problems resulting in exchange control and exchange restrictions. But since the Second World War, there has been significant revival in the flow of foreign capital. In seven years 1946-52. the net outflow of private long-term capital from the industrial countries amounted to $ II billion and in four years from 1955-5H. it exceeded $ 17 bilious.? The emergence of the West European countries and of the U.S.A. as lenders and the establishment of the World Bank largely contributed to this revival. In recent years. the flow of foreign capital from governments and international agencies has increased very rapidly (from an annual average of $2 billion in 1954-56 to $3.3 billion in 1958-59).
For instance. in India. between 1948-53, the inflow of foreign private capital amounted to meager Rs. 130 mes. During the Second Plan out of a total investment of Rs. 7,000 crores, the foreign investment was about Rs. 150 crores as against a target of Rs, crores, In the Third Plan. an inflow of Rs, 300 crores was anticipated. which was less than 3 per cent of. the total outlay, but the actual receipt was much less. Again ill the Fourth Plan Rs. 300 crores was the targeted amount, the actual loin,~ did not exceed Rs, 100 crores
Foreign capital generally hings along with it technical know-how. By providing technological expertise it helps in building modern industrial structure in the receiving countries. In this way. it adds to their aggregate national product and per capital income which not only works towards removing their poverty but increases the rate of savings which in turn accelerates the process of their growth. In course of time, the vicious circle of poverty is broken and the beneficial circle of prosperity is set in motion
Foreign capital provides valuable foreign exchange which is the desperate need of the developing economics. It is generally observed that. in the early years of development, the import hill of such countries goes on mounting because they have to import food-grains, machinery and capital and essential industrial raw materials.but their exports lag woefully behind. This creates balance of payments difficulties in the solution of which foreign capital proves a god-send
Benefits also accrue from foreign capital to domestic labor in the form of higher real wages. to consumers in the form of greater supply of consumer goods. larger in quantity, better in quality and greater in variety and to the government in the form of higher tax revenues. The economy benefits through the realization of external economics. Since foreign capital helps in building up economic infrastructure in the form of means of transport and communications.
Conclusion. Proper utilization of foreign capital is the crux of the problem. It should be so utilized as to transform the economy into a self-reliant and self sustained economy. Its ability to meet the service and repayment obligations will depend on the extent to which the Connolly is so transformed.