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Capital Flow

International capital flows have contributed to economic development in both advanced and developing countries. Private capital flows to developing countries increased significantly in the 1980s. Foreign direct investment provides benefits to domestic laborers through new jobs and higher wages, and to consumers through greater product variety, lower prices, and innovation. It also increases government revenue and stimulates domestic investment. Foreign capital is important for infrastructure development and economic growth in countries like China. Foreign direct investment involves investing in real assets abroad to gain management control, while foreign portfolio investment places funds in foreign financial assets for shorter-term returns. The type and motives for foreign direct investment depend on factors like accessing new markets, reducing costs, obtaining resources, or utilizing existing tangible and intangible assets.

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161 views7 pages

Capital Flow

International capital flows have contributed to economic development in both advanced and developing countries. Private capital flows to developing countries increased significantly in the 1980s. Foreign direct investment provides benefits to domestic laborers through new jobs and higher wages, and to consumers through greater product variety, lower prices, and innovation. It also increases government revenue and stimulates domestic investment. Foreign capital is important for infrastructure development and economic growth in countries like China. Foreign direct investment involves investing in real assets abroad to gain management control, while foreign portfolio investment places funds in foreign financial assets for shorter-term returns. The type and motives for foreign direct investment depend on factors like accessing new markets, reducing costs, obtaining resources, or utilizing existing tangible and intangible assets.

Uploaded by

Arihant Pawariya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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International Capital Flow

International factor movement contributed to economic


development
Economic development of advanced and developing countries
assisted by foreign capital.
Private capital flow increased since 1980s in developing
countries.

Role of foreign capital in developing countries

Domestic labours - Expansion of employment oppertunities, Higher real


wage, Increase in the productivity
Consumers - variety of product (choice increases, lower product prices,
quality product through innovation
Government - foreign capital might increase the fiscal revenue of the
government.
External economies Foreign capital used for infrastructure development ,
stimulate domestic investment in industrial and other sectors.
Spillover different forms like technology, skills, introudction of new
products, efficiency of domestic financial markets, improved resource
allocation etc.
Balance of Payment and Reserves india largest holder of reserve
Growth GDP growth, China because of high saving rate and huge inflow.

Foreign Direct Investment (FDI)

Investment in real and physical assets abroad


Either floating new firm or acquiring existing
Intention of the investor take active part in management
IMF defines FDI, the category of international investment
that reflects the objective of obtaining a lasting interest by; a
resident entity in one economy in an enterprise resident in
another coutnry. The lasting interest implies the existence of
long term relationship between the direct investor and the
enterprise and a significant degree of influence by the investor
on the mangement of the enterprise.

Foreign Portfolio investment (FPI)

Made in financial assets to earn better returns


Investment in number of ventures
Method of diversifying risk in investment
Relatively for short period
Investor not interested to take part in management
By any individual, firm or public body
In shares and financial securities

Classification of FDI:
Basis of Form Greenfield and Acquisition
Greenfield establishing new firm, increase wealth of nation,
spreaded effect on economy, flexibility to investing firms,
delay in establishment, higher risk and higher cost.
Acquisition investment in an existing firm in host country,
transfer of ownership, preferred when production commences
immediately, has brand equity and if investing firm believes
the technology and resources used by existing increase
betterment.

Basis of types of investment:


Horizantal FDI: firms investment in foreign country for same
product or service as in domestic country
Investment in same industry in which the firm is engaged
May expand production facility abroad and expand market
Vertical FDI: may be backward vertical FDI and forward
vertical FDI
BVFDI- acquire/establish to produce intermediaries,
Eg.Computer and harddisk
FVFDI- Establish to distribute the product abroad

Motives of FDI:
Market seeking FDI: expand the market to grow or to stay
competitive - Impetus factors-Countrys market size, income &
market growth.
Efficiency seeking FDI: cost efficiency than domestic, may be
labour, transport and communication & cost of intermediaries
Country with good infrastructural facilities, skilled labour helps
cost effective and timely delivery attract this
Resource seeking FDI: Available natural resources, when home
country lack technology or capital to extract.
Created asset seeking FDI: earlier created manmade assets, can
be tangible or intangible,
Tangible financial and physical assets (communication)
Intangible knowledge assets (skill, knowledge, managerial,
learning capacity, trade mark, goodwill & brain power)

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