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International Capital Flow

International factor movement contributed to economic

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

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
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

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)