Needs of Foreign Capital for Developing Economics

Most of the developing economies suffer from low level of income and low level of capital accumulation. Since the domestic resources to carryout economic growth are insufficient, they have to depend on foreign capital. Following arguments may be advanced to show need for foreign capital for developing economies:

Sustaining a high level of investment:

Since the developing economies want to industrialize themselves within a short period of time, it becomes necessary to raise the level of investment substantially. Because of general poverty of masses, the savings are often very low. This causes a gap between desired investment and savings. This gap has to be filled up through foreign capital.

Upto date and modern technology:

The developing economies have low level of technology as compared to developed economies. This raises the necessity for importing technology from the developed countries. Upto date and modern technology usually comes with foreign capital. Technology gap is filled up through the following three ways:

  • Provision of expert services.
  • Training of personnel of host country.
  • Educational research and training institutes in the country.

Exploitation of natural resources:

A number of developing countries possesses huge mineral resources which await exploitation. These countries themselves do not possess the required technical skill and expertise to accomplish this task. As a consequence, these countries have to depend upon foreign capital to undertake the exploitation of their natural resources.

Undertaking the initial risk:

Many developing economies suffer from acute scarcity of private entrepreneurs. This create obstacles in the programs of industrialization. Foreign capital undertakes the risk of investment in the host countries and provides the much needed impetus to the process of industrialization.

Once the programs of industrialization gets started with the initiative of foreign capital, domestic industrial activity starts picking up as wore and more people of the host country enter the industrial held.

Development of basic economic infrastructure:

Generally, the domestic capital of developing economies is inadequate to build up the economic infrastructure on its own. Developing economies require the foreign capital to develop transport and communications, generation and distribution of electricity, development of irrigation facilities etc.

Foreign exchange reserves:

In the initial phase of their economic development, developing economies face the problem of foreign exchange. Their imports are much larger than their exports. As a result, the balance of payments generally turns adverse. This creates a gap between the earnings and expenditure of foreign exchange foreign capital is required to fill up this gap.

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