Question

What are the main forms through which foreign capital flows into LDCs? Discuss the evolution of the various forms across the last decade.

Answer 1

As countries begin their growth path, numerous companies begin expanding into countries which previously were not known for development. LDC's refer to least developed countries wherein the per capita income is low, the overall aggregate demand for goods and services remains on the lower side, and all connected variables such as access to nutrition, health care etc also suffers.

Underdeveloped or least developed countries over the years have seen significant investments through foreign capital flows and are described in details as follows: -

1) Foreign Direct Investments: -

Foreign Direct Investments is one of the most popular methods, through which investment flows into an economy. The least developed countries have the maximum capacity of expansion and are seen as a hot spot of investment due to the lacking demand which is created once companies begin to come into the country.

We have seen examples of countries such as China and India which were earlier devoid of any development and were living under extremely harsh conditions. Once they opened up the economy and invited foreign capital, in turn they started growing at a very high rate.

Foreign Direct Investment takes place, when companies directly establish the same entity in another country and begin selling in that country or produce their and sell their products globally. This brings in capital into the country and helps in growing.

2) Exports

As a country grows and brings in capital and begins manufacturing more goods and services, the economy shifts and becomes rich in exports as well. The exports directly bring in capital into the economy.

For example, China has become a manufacturing hub and was earlier recognized as a least developing country. Participation of India in the service sector is seen as major result of the globalization and open market criteria which it adopted in 1990's and since then has evolved and grown continuously.

3) Partnerships: -

Numerous firms also believe in partnerships and enter least developed countries to avail the benefits of local as well as foreign play. For example, local players often have the advantage of being well developed in terms of infrastructure and supply lines and are aware of the complexities involved in the same.

These partnerships and alliances bring in huge flow of capital into least developed countries. For example, Hero Honda in India, Pakistan and Bangladesh etc has been able to supply as well as sell its vehicles and is a major source of capital inflow into the countries from abroad.

4) Grants and Direct Government Investments: -

Least developed countries receive huge grants from governments as well as financial institutions which enables them to earn more with time.

The IMF and the World Bank for an example grant huge capital loans at minimum interest rates to these countries which allows them to grow. Also, governments of foreign nations also heavily invest in countries for example, Pakistan receives a lot of money, from China which is to develop the region and to integrate it and develop infrastructure and trade in Asia.

5) Foreign Portfolio Investments: -

Another category of investments is through creation of a foreign portfolio. A portfolio is nothing but a group of shares or investments which are bought usually by high net worth individuals and brings in foreign capital and helps in development of least developed countries.

For example, JP Morgan directly invests in companies across the globes which helps in their economies gaining capital.

Please feel free to ask your doubts in the comments section if any.