Role of Foreign Capital

In most of the developing countries like India, domestic capital is insufficient for the economic growth. Foreign capital is usually seen as a means of fulfilling gaps between the domestically available supplies of savings, foreign exchanges, government revenues, and the planned investments necessary to attain the developmental targets. An inflow of private foreign capital helps in removing the shortage in the balance of payments. It also helps to fill the gap between governmental tax revenue and the locally raised taxes. By taxing the earnings of the foreign enterprises the governments of developing countries are able to mobilize funds for projects like energy, infrastructure that are badly needed for economic development.

The Foreign investment meets the gap in management, entrepreneurship, technology, and skill. The foreign capital is believed to help in the generation of employment; the main requirement of a country like India.

Foreign investment is divided into two forms. The investment made in physical assets by foreign individuals, companies, or financial institutions is called 'Foreign Direct Investment (FDI). The investment made in financial assets is called ion Portfolio Investment' (FPI). The interests, profits and dividends gained on these foreign investments may be invested abroad. India has developed a lot and still is on the path of development.