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FOREIGN DIRECT INVESTMENT (FDI)FDI is one in which a foreign investor owns physical assets abroad.

Need For Foreign CapitalWhen domestic capital is inadequate for purposes of eco. growth.When domestic and entrepreneurship may not flow to certain lines of production.When capital market is underdeveloped.It brings in technical know-how and business experience which are necessary for eco.devpt.

Different forms Direct foreign Investment.It means that the foreign investor invests in the capital receiving country in the form of cash, machinery, know-how etc.Portfolio(Indirect)InvestmentIt consists of the holdings of transferable securities, shares and debentures of the capital receiving country purchased by the foreign private individuals and institutions.They are known as Foreign Institutional Investors (FIIs).Inter-Govtal Loans. This has become prevalent after the second world war.Many developed countries provide direct intergovtal loans and grants to many developing countries.

Equity capital:- two types1direct foreign investmentIt involves the control of enterprises in which the foreigners invest.---2Foreign portfolio management. It is the purchase of Indian stocks by the foreigners.

Significance1) Creation of new technology, entrepreneurial skill and new ideasForeign firms promote the diffusion of technological advance in an economy.It gives access to foreign knowledge and helps to bridge the managerial and technological gap in many developing countries.

2) Encouragement to Local Investment and EnterpriseTwo forms -1.By entering into partnership with local entrepreneurs.2.- By creating dd. for ancillary or subsidiary products.

3) It may lead to the training of labour in skills which in turn can be transmitted to other members of the labour force.

4) Useful for capital formation.A major portion of the profit generated by many industries can be ploughed back for the expansion of the existing unit or the setting up of new units.

5) Real addition to the Productive Capacity of Capital importing country.

6)more productive.Since pvt.foreign investments are subject to profit motives, they are likely to be employed more productively.7)Helpful in reducing the bop problein the early stages of devpt. There is no repatriation commitments since the inflow of capital takes place in the initial stages of devpt. But when profits are repatriated bop problems crop up.8)Technical know-how.It enables the recipient country to organize the resources in the most efficient manner.

9)High standard.Pvt. foreign capital brings with it the industrial culture of advanced countries. The beneficial influence of foreign capital can be seen in the foreign concerns, in the firms working on collaboration basis etc.

10) Marketing Facilities.Foreign investments provide different marketing outlets. The MNCs undertake export and import amoung their own units located in different countries It will help a country in opening up its economy with the rest of the world.

DISADVANTAGES. 1) Distort the pattern of development of the economy.Foreign capitalists will be guided by the maximization of profit and the priority sectors will be neglected.

2)Adverse effects on domestic savings.If pvt. foreign investment reduces profits in domestic industries, it will adversely affect the profit earnings and further reduce domestic savings.

3)Adverse effect on the bop. of the recipient countries.it happens when profits are repatriated.

4) Not useful on political grounds.It may lead to the loss of political independence.

5) Limited coverage.Pvt. capital usually restricts itself to certain limited spheres of economic activity.

6) Increases more dependence on foreign sources. Why?1.Uses of foreign technology does not permit the development of indigenous technology. 2. Foreign technology used requires import of goods for replacement and maintenance therby creating bop problems.

7) Foreign collaboration agreements may contain some restrictive clauses which may be harmful to developing countries.Eg fixing export quota.

8) Remittaance of Large amounts in the initial stages is very high since the rate of return on initial investment is very high. It causes a lot of hardships to the aid receiving economies.