How Foreign Capital Promotes Growth

For centuries, foreign capital has been viewed negatively. Governments all over the world have indulged in propaganda that calls foreign capital a tool for enslavement of the people. The governments that did this propaganda had hidden agendas. They did not want to pay the debt that was incurred by their predecessors. The socialist government in Russia was a prominent example. They felt no obligation to pay back the debt incurred by their Tsarist predecessors and hence simply decided to confiscate the capital.

The common knowledge related to foreign capital is therefore riddled with such misinformation. Foreign capital is in fact one of the best ways for developing countries to break the cycle of poverty and move forward in the economic realm. In this article, we will discuss some of the major advantages of foreign direct investment.

Helps In Building Capital Equipment

Poor countries are poor because they do not have the infrastructure required to create wealth. Infrastructure is an important capital equipment for any country. Roads, ports and electricity are needed if a nation has to prosper. Poor nations neither have the funds required to build such infrastructure nor does anyone want to lend the money to them. This is because these infrastructure projects require huge upfront costs. They also have a high gestation period. This means that the payback period for the investment is very high making it even more difficult to develop the nation in the absence of foreign aid.

In such cases, foreign investment comes in handy. Consider the case of colonial India and Pakistan. The investment in railways was done by British i.e. foreign capital. However, seven decades after the British have left the nation the railways still heavily contribute to the economic well-being of these nations.

Helps In Transfer of Knowledge

The reason why developing countries are poor is because they lack in technology and know-how. They lack both the equipment as well as the people with specialized skills. When foreign investment makes its way in a nation like this, the technology of the nation is also developed. Foreign capital therefore helps in up gradation of people and equipment and makes a nation competitive in the international market.

Balance of Payments

Companies need to have a balance between what they import and what they export. Poor countries often import much more than they export. As a result, they do not have the foreign exchange to pay for the balance. In the absence of foreign exchange, companies are forced to go into debt to make these payments. Foreign direct investment is often aimed at producing goods which will then be exported to other countries. For instance, Ford has set up a factory in India where it manufactures cars and sells to all countries within the south-east Asian region. As a result, Indian earns foreign exchange which it can then use to pay for essential imports of oil and other strategic commodities.

Risk Taking Ability

Developing countries tend to have a lot of unused natural resources. When companies from developed nations set up shop in these countries, they employ technology which is able to take full advantage of these resources. The inaccessible and remote areas of the developing nation become much more accessible with the use of latest technology. This is definitely beneficial to the home country.

Helps in Controlling Inflation

Developing countries face severe inflationary bouts when they are developing at a fast pace. This is because fast development often requires government expenditure. Governments usually spend money that they have created via their fiat powers. As a result, high volume of government spending leads to high rates of inflation. However, the inflation only seeps into the goods and services that are manufactured locally. If the goods are imported from abroad, the producer of those goods faces a totally different cost structure. Hence, they will not raise the prices based on government spending in the developing countries. Big amount of imports from foreign countries help in controlling the inflationary pressures.

Improves Standard of Living

Increasing foreign investment has a direct positive impact on the standard of living of any country. Consider the case of China and India. Both these countries have seen a considerable rise in their standard of living after western capital started establishing factories and offices on their soil. The most immediate impact was the increase in income. This has lead to increased productivity and higher standard of living for other sectors of the economy as well. There has been a marked rise in the expenditure on education and entrepreneurship has grown by leaps and bounds. Cities like Shenzhen and Bangalore have grown from the dust to become prominent centers of international trade.

The gist of the matter is that foreign capital has been viewed negatively for the past century. This is because imperialism was the end result of the first wave of foreign investment. The East India Company had started as traders until they enslaved several nations.

One needs to understand that the modern wave of foreign capital is not interested in the enslavement of locals. We live in a connected world wherein exploitation by corporations would lead to an end to their businesses. Hence, in the 21st century, there are considerable advantages to accepting foreign capital and very few disadvantages.