Private foreign investment plays an important role in the economic development of the recipient countries.
1. Private foreign investment goes directly into capital formation and thus it constitutes a net addition to investible resources in the recipient country. Thus it helps in pushing up the rate of growth of the economy.
2. Being subject to business calculation of private profit it is likely to be employed more productively as compared to public financial aid.
3. Foreign investment may also induce more domestic investment. For instance, ancillary domestic units can be set up to ‘feed’ the main industrial unit set by the foreign investor.
4. By setting an example, and through the training that they sponsor, foreign direct investments contribute to the transfer of technology to the underdeveloped countries and in encouraging the growth of skills.
5. Since returns on foreign are linked to the profits earned by the firm, it is more ‘flexible’ as compared to foreign loans which are guided by rigid interest and other requirements.
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