Difference Between Foreign Capital and Foreign Aid -
September 10th, 2010
Foreign capital implies funds that are raised from foreign investors for investment purposes in development projects in a host country.
Foreign capital can enter the country in the form of:
- Direct Investment: means the concerns of the investing country exercise de facto control over the assets created in the capital importing country by means of that investment. E.g. MNC’s
- Indirect Investment: better known as portfolio investment consists mainly of the holding of transferable securities or guaranteed by the govt. of the capital importing country. Such holdings do not amount to right to control the company. E.g. shares, debenture, bonds etc.
3. Foreign capital has nothing to do with social expenditures such as education, public health, technical training and research.
4. Foreign capital helps reduce shortage of domestic savings through the inflow of capital equipment and raw materials thereby raising the marginal rate of capital formation.
- It overcomes not only capital deficiency but also technological backwardness.
- It also helps in industrializing the economy.
- It creates more employment.
5.There are no special repayment schedules or soft terms.
It generates money in the economy and helps in minimizing the inflationary pressures.
6.Foreign capital helps in movement of technical know-how and advancements and proves to be of great dynamism.
7. Foreign capital is advanced to the developing countries mainly after observing the opportunities and evaluating the credibility of the recipient country.
Movement of money from one country to another in the form of aid for development is referred to as the foreign aid.
Foreign aid flows to developing countries in the form of loans, assistance and outright grants from various governmental and international organizations.
Foreign aid is more important than foreign capital because the financial needs of the developing countries cannot be alone met by raising foreign capital.
Foreign aid facilitates investment in low-yielding and slow projects. Such an aid can be used by the recipient country in accordance with its development programmes. Foreign aid is important for easing of foreign exchange constraint in a country with sluggish export growth and other foreign exchange problems.
- It minimizes inflationary pressures
- It also overcomes the balance of payments difficulties.
Foreign aid is allocated on long repayment schedules, at lower interest rates and softer terms. Debt servicing becomes a burden if aid is tied or the terms of aid are onerous.
Generally repayment of principal and interest exceed the gross external aid with the result that there is net outflow on this account.
Foreign aid leads to dependency amongst the developing countries & is often used for extremely wasteful projects.
Trade follows aid: i.e. aids make way for investments in the recipient countries resources.
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