Following arguments are advanced in favour of foreign capital:-
- Sustaining a high level of investment: Since the underdeveloped countries want to industrialise 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 up through foreign capital.
- The technological gap: The underdeveloped countries have low level of technology as compare to the advanced countries. However, they possess a strong urge of industrialisation 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 the developed 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 fillings up the technological gap through the following three ways: a) provision of export service; b) training of Indian personnel; and c) educational, research and training institution in the country.
- 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.
- Undertaking the Initial risk: An argument advanced in favour of the foreign capital is that it undertakes the ‘risk’ of investment in the host countries and thus provides the much needed impetus to the process of industrialisation. Once the programme of industrialisation gets started with the initiatives of foreign capital, domestic industrial activity starts picking up as more and more people of the host country enter the industrial field.
- Development of basic economic infrastructure: In the latter half of twentieth century especially during the last three-four decades, international financial institutions and many governments of advanced countries have made substantial capital available to the underdeveloped countries to develop their system of transport and communications, generation and distribution of electricity, development of irrigation facilities, etc.
- The foreign exchange gap: In the initial phase of their economic development, the underdeveloped countries need much larger imports (in the form of machinery, capital goods, industrial raw materials, spares and components) than they can possibly export. As a result, the balance of payments generally turns adverse. This creates a gap between the earnings and expenditure of foreign exchange and it has to be filled up through foreign capital. By breaking a production bottleneck and allowing the utilisation of previously underutilised capacity, the importation of strategic capital goods or foreign material provided by external aid can permit a sizeable expansion of output from complementary domestic resource that would otherwise remain unused.
Critical Appraisal of foreign investment
- Special concessions to the foreign investors: The governments of the developing countries have to provide special facilities and concessions of the foreign investors to attract them. These may include tax concessions, provision of subsidised inputs, financial assistance, freedom of remit profits in foreign exchange despite tight foreign exchange position, etc.
- Payments of dividends and royalty: A large sum of money flows out of the country in terms of payment of dividends, profits, royalties, technical fees and interest to the foreign investors. In fact, royalty payments by the Indian arms of MNCs have spurted after a three year old Central government move waiving restrictions in this regard, eventually hurting minority shareholders.
- Elitist orientation of production: Foreign investment (particularly by MNCs) is more interested in quick-profit yielding consumer goods sector. Thus, its emphasis is on producing goods for the cash-rich but small elite sector of the developing countries like cosmetics and toiletry items, colour televisions, music systems, cellular phones, luxury cars, etc. This leads to scarce economic resources to the production of non-essential items.
- Agreements loaded un favour of foreigners: The terms of agreements are mostly weighted in favour of the foreign collaborators and against the domestic interests. This is due to the weak bargaining power of the developing countries and the eagerness of their governments to acquire foreign participation in the face of foreign exchange shortage.
- Multiple collaborations and over-import of equipments: At times, the governments of the developing countries permit multiple collaborations, i.e. repetitive import of the same or similar technology. This results in repetitive payments without adding to the stock of technical knowledge in the country. Sometimes equipments are imported even when they are available locally, sometimes they remain idle for want of spares, and often the processes are more highly mechanised and sophisticated than is warranted by the requirements of the domestic country.
- Restrictive clauses in agreements: The most important criticism of foreign collaboration agreements is the presence of various restrictive clause in them.
- Distortion of economic structure: Foreign investment (particularly by MNCs) can inflict heavy damage on the host country in various forms such as suppression of domestic entrepreneurship, extension of oligopolistic practices, supplying the economy with unsuitable technology and unsuitable products, helping the growth of monopolies and concentration of economic power thereby worsening the income distribution, etc.
- Foreign resources used to acquire existing assets: A substantial part of foreign resources is not going into fresh capital formation but in mergers and acquisitions.
- Increase in regional inequalities: States like Maharashtra and Haryana have received more than half of FDI inflows. A large part of the country has received only negligible parts of inflows. Thus, FDI has accentuated regional disparities still further.
- Political interference: Because of their immense financial and technical power, the MNCs have gained necessary strength to influence the decision-making process in underdeveloped countries. The governments of underdeveloped countries have also felt threatened by the direct and indirect interference of MNCs in their internal affairs.
- Technology transfer not necessarily conducive to development: As far as transfer of technology to underdeveloped countries is concerned, the behaviour pattern of MNCs reveals that they do not engage in R&D activities within the underdeveloped countries. Their R&D efforts are concentrated in laboratories in the home country or in the other industrialised countries.