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OBJECTIVES OF FOREIGN DIRECT INVESTMENT'S AND PI

OBJECTIVES OF FOREIGN DIRECT INVESTMENT'S AND PI

Discuss OBJECTIVES OF FOREIGN DIRECT INVESTMENT'S AND PI within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; 1. Sustaining a high level of investment - Since the underdeveloped countries want to industrialized themselves within a short period ...

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OBJECTIVES OF FOREIGN DIRECT INVESTMENT'S AND PI - September 10th, 2010


1. Sustaining a high level of investment - Since the underdeveloped countries want to industrialized themselves within a short period of time, it becomes necessary to raise the level of investment substantially. This requires, in turn, a high level of savings.


However, because of general poverty of masses, the savings are often very low. Hence emerges a resource gap between investment and savings. This gap has to be filled through foreign capital.

2. Technological gap - The under developed countries have very low level of technology as compared to the advanced countries. However they possess strong urge for industrialization to develop their economies and to wriggle out of the low level equilibrium trap in which they are caught.


This raises the necessity for importing technology from advanced countries. Such technology usually comes with foreign capital when it assumes the form of private foreign investment or foreign collaboration. In the Indian case technical assistance received from abroad has helped in filling the technological gap through the following three ways:

(a) Provision for expert services

(b) Training of Indian personnel

(c) Education research and training institution in the country



3. Exploitation of natural resources - A number of underdeveloped countries possess huge mineral resources, which await exploitation. These countries themselves do not possess the required technical skill and expertise to accomplish this task. As a consequence, they have to depend upon foreign capital to undertake the exploitation of their mineral wealth.



4. Undertaking the initial risk - Many under developed countries suffer from acute private entrepreneurs. This creates obstacles in the programs of industrialization. An argument advanced in favour of the foreign capital is that it undertakes the risk of investment in host countries and thus provides the much-needed impetus to the process of industrialization.


Once the programme of industrialization gets started with the initiative of foreign capital, domestic industrial activity starts picking up as more and more of the host country enter the industrial field.



5. Development of basic economic infrastructure - It has been observed that the domestic capital of the under developed countries is often too inadequate to build up the economic infra structure of its own. Thus these countries require the assistance of foreign capital to undertake this task.


In the latter half of the 20th century, especially during the last 3-4 decades, international financial institutions and many governments of advanced countries have made substantial capital available to the under developed countries to develop their system of transport and communications, generation and distribution of electricity, development of irrigation facilities, etc.

6. Improvement in balance of payments position - In the initial phase of the economic development, the under developed countries need much larger imports (in the form of machinery, capital goods, industrial raw materials, spares and components), then they can possibly export. As a result, the balance of payments generally turns adverse. This creates a gap between the earnings and foreign exchange. Foreign capital presents short run solution to the problem.

This shows that the economic development of an underdeveloped country should obviously receive a boost as a result of foreign capital.
Accordingly, if foreign capital is obtained on easy terms and without any ‘strings’, it should be welcomed. However, as noted by John P. Lewis, “despite denials, the fact is that all foreign aid carries strings and every foreign aid relationship involves bargaining, however genteel, between aiding and receiving parties.”




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