Economics(Paper-4) - Shivaji University

4.2.2 Foreign Capital and Aid in Economic Development :
I) Introduction and Foreign Capital and Aid :
The level of capital formation is very low in developing countries, thus, they can
not meet the financial requirements to have their economic development. At this critical
juncture, developing country must import capital which they can not produce. To pay
for the imports, the external resources are borrowed in the form of foreign capital or
aid.
History reflects that almost every country had to rely on foreign capital and foreign
aid for speeding up economic growth. According to Prof. W.A. Lewis England as well
as U.S.A. have had assistance of foreign finance in 17 th , 18 th and 19 th century
respectively. Thus it is very much clear that both developed and underdeveloped countries
have to have a foreign capital to get desired economic growth.
II) Meaning :
Foreign Capital means investment by foreign government, private foreign investors,
and international financial institutions in the productive activities to a receipt country.
Thus, when a country receives capital from any corner of the world is called foreign
capital.
Foreign aid is the aid which flows from the Donar country or International Financial
Institutions in the form of grant, loans, technical assistance to receipent country.
III) Forms or Classification of Foreign Capital
In the view of receiving country foreign capital can be divided into two parts
1) Private Foreign Capital
2) Public Foreign Capital
1) Private Foreign Capital :
The private foreign capital can be received from private sources, it may be private
individual or private corporation i.e. Multinationals. They invest in private sector or public
sector.Thus, the private foreign capital may be of the following types.
a) Direct Foreign Investment (FDI) : Foreign Direct Investment is incurred by
private enterprenuers in a subsidiary in another country or enterprises of a another
country.The investors have full or partial control on the enterprises of another country.
They bear risk as well profit.
b) Indirect Foreign Investment : The indirect foreign Investment is also
recognized as “Portfolio investment” or “rentier investment”. Foreign investor or a
company can hold shares and debentures of some other countries. Such holdings of
securities does not give any right to control over the company. But, they as a shareholder
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