Skip to main content

International Capital Movements| Detailed Description

INTERNATIONAL CAPITAL MOVEMENTS

INTRODUCTION 


We find enormous increase in international movement of capital. This phenomenon has received a great deal of attention from not just economists and policy-makers but people in different walks of life including workers' organisations and members of civil society. 

TYPES OF FOREIGN CAPITAL


The term'foreign capital' is a comprehensive one and includes any inflow of capital into the home country from abroad and therefore, we need to be clear about the distinction between movement of capital and foreign investment. Foreign capital may flow into an economy in many ways. Some of the important components of foreign capital flows are:

(1) Foreign aid or assistance which may be:
(a) Bilateral or  direct inter government grants
(b) Multilateral aid from many government who pool funds to a international organizations like the World Bank
(c) Tied aid with strict mandates regarding the use of money or unitied aid where there are no such stipulations
(d) Foreign grants which are voluntary transfer of resources  governments, institutions, agencies or organizations

(2) Borrowings which may take different forms such as:
(a) Direct inter government loans
(b) Loans from international institutions  (e.g. world bank, IMF, ADB)
(c) Soft loans for e.g. from affiliates of World Bank such as IDA
(d) External commercial  borrowing, and
(e) Trade credit facilities

(3) Deposits from non-resident Indians (NRI)

(4) Investments in the form of:
(a) Foreign portfolio investment (FPI) in bonds, stocks and securities and
(b) Foreign direct investment (FDI) in industrial, commercial and similar other enterprises

FOREIGN DIRECT INVESTMENT (FDI)


Foreign Direct Investment is defined as the resident of one country (i.e. the home country) acquires ownership of an asset in another country (i.e. the host country) and such flow of capital involves ownership, control as well as management of the asset in the host country. Foreign Direct Investment (FDI), This typically occurs through acquisition of more than 10 percent of the shares of the target asset.The acquisition of  ten percent of the ordinary shares or voting power in a public enterprise or private enterprise by non-resident(NRI) investors makes it eligible to be categorized as foreign direct investment  (FDI). India also follows the same pattern of classification. FDI has three major components, viz., equity capital, reinvested earnings and other direct capital in the form of intra-company loans between direct investors and affiliate enterprises.

Foreign direct investors may be individuals, incorporated or unincorporated private or public enterprises as well as subsidiary, associated groups of individuals or enterprises, governments or government agencies, estates, trusts, or other organizations or any combination of the above mentioned entities. The important forms of direct investments are as: opening of overseas companies, the establishment of subsidiaries or branches, creation of joint ventures on a contract basis, joint development of natural commodities and purchase or annexation of companies in the country receiving foreign capital.

Direct investments are real investments in factories, assets and land etc. and involve foreign ownership of production facilities. The investor retains and control over the use of the invested capital(flow money) and also seeks the power to exercise control over decision making to the extent of its equity participation. The lasting interest implies the existence of a long-term relationship direct between the investor and the enterprise(public and private) and a significant degree of influence by the investor on the management of the enterprise.

FDI may be categorized as horizontal, vertical or conglomerate:
  1. A horizontal direct investment is known to take place when the investor establishes the same type of business operation in a foreign country as it operates in its one country i.e. home country.
  2. A vertical investment is one under which the investor establishes or acquire a business activity in a foreign country which is different form the investor's main business activity yet in some way supplement its major activity. For example;an automobile manufacturing companies may acquire an interest in a foreign company who supplies parts or raw materials which required for the company.
  3. A conglomerate type of foreign direct investment(FDI) is one where an investor invests in a foreign business that is unrelated to its existing business in its one country i home country . this often in the form of a joint venture with a foreign firm already operating in the industry as the investor has no previous experience

FOREIGN PORTFOLIO INVESTMENT  (FPI)


Foreign portfolio investment is the flow of what economists call 'financial capital' rather than 'real capital' and does not involve ownership or control on other part of their investor. Examples of the foreign portfolio investment are the deposit of funds in an Indian or a British bank by an Italian company or the purchase of a bond (a certificate of indebtedness) of a Swiss company or of the Swiss government by a citizen or company based in France. Unlike FDI, portfolio capital, in general, moves to investment in financial stocks, bonds and other financial instruments and is effected largely by individuals and institutions through the mechanism of capital market. These flows of financial capital have their immediate effects on balance of payments of exchange rates rather than on production or income generation.

Foreign portfolio investment  (FPI) is not concerned with either manufacture of goods or with provision of services. Such investors also do not have any intention of exercising voting power of controlling or managing the affairs of the company in whose securities they invest. The singular intention of a foreign portfolio investor is to earn a remunerative return through investment in foreign securities and is primarily concerned about the safety of their capital, the likelihood of appreciation in its value, and the return generated. Logically, portfolio capital moves to a recipient country which has revealed its potential for higher returns and profitability. 

Distinguish between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are as follows:

 
Foreign Direct Investment (FDI)
  • Investment involves creation of physical assets
  • Has a long term interest and therefore remain invested for long 
  • Relatively difficult to withdraw
  • Not inclined to be speculative 
  • Often accompanied by technology transfer
  • Direct impact on employment of labour and wages
  • Enduring interest in management in management and control
  • Securities are held with significant degree of influence by the investor the management of the enterprise
Foreign Portfolio Investment (FPI)
  • Investment is only financial assets
  • Only short term interest and generally remain invested for short periods
  • Relatively easy to withdraw
  • Speculative in nature
  • Not accompanied by technology transfer
  • No direct impact on employment of labour and wages
  • No abiding interest in management and control
  • Securities are geld purely as a financial investment and no significant degree of influence on the management of the enterprise.

Comments

Post a Comment

Popular posts from this blog

Detailed Information About National Income

A Complete Information Of   National Income INTRODUCTION When we undertake the study of national economics, we are interested in macroeconomics aggregates such as, aggregate income, output, employment, prices, consumption, savings, investment etc. Just as there are accounting conventions, measure the performance of business, there are conventions for analyzing the economic performance of a nation.  National income means the net value of final  goods and services produced within the domestic territory of a country in an accounting year plus the net factor income from abroad.  The basic fundamental principle of national income is based on the following basis:                         In a nation Production=Sale=Income ∴ GDP:  The aggregate value of all the final goods and services produced in the domestic territory of the country during a period, generally a year. Domestic territory is defined to incl...
Post a Comment
Read more

Fiscal Policy - Meanings, Objectives, Types | Detailed Review

I NTRODUCTION: FISCAL POLICY The macroeconomics perspective, the focus is on the aggregate economic activity of governments, say, aggregate expenditure taxes, transfers and issues of government debts and deficits and their effects on aggregate economic variables such as aggregate output, aggregate employment, inflation, global economic growth etc. These, in case, form the subject material of fiscal policy. The connotation of fiscal policy as a strategy for achieving certain socio economic purpose was not perceived or widely acknowledged before 1930 due to the faith in the fixed role of government advocated by the then prevailing laissez-faire approach. Great Depression and the consequent instabilities made policymakers support a more proactive role for governments in the economy. However, later on, markets fail to achieve optimal outcomes and the need for government intervention to combat those market failures. In latest times, especially after being portended by the global financial c...
Post a Comment
Read more

Control Of Money Supply | Important Terms - CRR, SLR, RR, BR, RRR, Open Market Operations

Control Of Money Supply By The Central Bank                             The central bank of the country adopts various measures to handle or control the supply of money in the economy. Largely, these measures relate to credit supply of the commercial banks. These are broadly classified as: Quantitative Instruments, and Qualitative Instruments. (A) Quantitative Instruments Of Credit Control Qualitative Instruments are those instruments of credit control which focus on the overall supply of money in the economy. Supply of money is lowered to tackle inflation, and it is raised to tackle deflation. Following are the points which are used in quantitative instruments of credit control in the economy:- Bank Rate: Bank rate refers to the rate of interest at which the central bank lends money to the commercial banks. It relates to instant (immediate) loan requirement of the commercial banks. When bank rate is increased, marke...
2 comments
Read more