This article analyzes the various issues relating to foreign capital investment in India
and estimates dynamic panel data models more specifically the Generalized Method
of Moments (GMM) technique by using data for 300 companies for the period
1984-85 to 2003-04, for empirically identifying the determinants of demand for foreign
capital of the private corporate sector in India. The period analysis has also been carried
out to gauge the impact of liberalization on the determinants. The paper finds that
domestic long-term borrowings ratio, size of the firm, and market risk are the major
determinants of the demand for foreign capital of the private corporate sector in India.
Foreign capital can make a valuable contribution by augmenting domestic savings and by
providing access to up-to-date technology. Nowadays some micro units have begun to view it
as a substitute source of funds. Broadly, the foreign capital can be divided into two types i.e.,
Foreign Direct Investment (FDI), and Foreign Portfolio Investment (FPI). Foreign Direct Investment
(FDI) refers to international investment in which the investor obtains a lasting interest in an
enterprise in another country. Most concretely, it may take the form of buying or constructing
a factory in a foreign country or adding improvements to such a facility, in the form of property,
plants or equipment. FDI is calculated to include all kinds of capital contributions, such as the
purchases of stocks, as well as the reinvestment of earnings by a wholly-owned company
incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or branch.
The reinvestment of earnings and transfer of assets between a parent company and its subsidiary
often constitutes a significant part of FDI calculations. Foreign Portfolio Investment (FPI) is a
category of investment instruments that are more easily traded, may be less permanent, and
do not represent a controlling stake in an enterprise. These include investments via equity
instruments (stocks) or debt (bonds) of a foreign enterprise which does not necessarily represent
a long-term interest.
From the macroeconomic domestic policy point of view, there are two factors which can
affect the volume and the composition of capital inflows i.e., high uncertainty about domestic
economic policy, and a high degree of irreversibility of investment. From the micro point of
view, the factors which can affect the volume of international capital inflow are availability ofother external funds, profits of the company, size of the firm, liquidity, corporate tax rate, etc.
The role of foreign capital in the process of industrial and overall growth has changed in India
since the beginning of the economic planning. The increasing relaxation, liberalization were
experienced during 1980s. The period after 1991 can be called the halcyon days of the eager
welcome, open-door or open-arm policy, and an increasing thrust towards international
integration and globalization. So the role of foreign capital is increasing now in India. |
