The need for Foreign Capital :
1. Capital investment requirements – Since underdeveloped countries want to
industrialize themselves within a short period of time, it becomes necessary to
increase capital investment substantially. This requires a high level of savings.
However, because of general poverty, the savings are very low. This creates a
resource gap between investment needs and savings. This gap has to be filled
through foreign capital.
2. Technology transfers – The under developed countries have lower technological
capacity as compared to advanced countries. The desire for industrialization creates
the need for importing technology from advanced countries. Such technology transfer
usually comes with foreign capital in the form of private foreign investment or foreign
collaboration. The technological gap is reduced by training domestic personnel and
through establishment of educational, research or training institutes.
3. Exploitation of natural resources – A number of underdeveloped countries
possess huge mineral resources, which can be exploited for economic development.
These countries 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.
4. Development of entrepreneurship – Many under developed countries suffer from
shortage of private entrepreneurs. This creates a limitation in the process of
industrialization. Foreign capital undertakes the risk of investment in host countries
and thus provides the much-needed impetus to the process of industrialization. Once
the process of industrialization gets started with foreign capital, domestic industrial
activity also increases through greater local participation. This automatically develops
5. Development of economic infrastructure – The domestic capital in under
developed countries is inadequate to build the required level of economic infra
structure. Thus these countries require the assistance of foreign capital to undertake
this task. Over the last 50 years, international financial institutions and governments
of advanced countries have made substantial capital available to the under
developed countries to develop their economic infrastructure in the form of transport
and communications systems, generation and distribution of electricity, development
of irrigation facilities, etc. The basic intention is to build an economic model for
achieving sustainable development.
6. Financing balance of payments deficit – In the initial phase of economic
development, under developed countries face larger imports (in the form of
machinery, capital goods, industrial raw materials, spares and components), than
exports. The deficit in the balance of trade is financed by inflow of foreign capital.
The economic development of an underdeveloped country therefore needs foreign
capital to initiate its economic development process and sustain it till desired level of
stability is reached.