The capital available to any country other than the domestic capital in order to finance any domestic purpose is called foreign capital. Need for Foreign Capital
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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 local entrepreneurship.
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