Foreign Capital As A Country 's Economic Development Essay

Foreign Capital As A Country 's Economic Development Essay

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Foreign capital plays a constructive role in a country’s economic development. Sometimes domestically available capital is inadequate for the purpose of various developmental processes. Foreign capital is seen as a way of filling in gaps between the domestically available supplies of savings, government revenue, foreign exchange and the planned investment necessary to achieve developmental targets. This is very true in case of various developing countries like India.

India is the second fastest growing major economy in the world. Indian economy is diverse and encompasses agriculture, handicrafts, manufacturing, textile and a multitude of services. India adopted socialist inspired approach for most of its independent history with the strict government control over private sector participation, foreign trade and foreign direct investment. In 1991, Government of India initiated a no. of economic reforms. As a result of the various policy initiatives taken, India has rapidly changing from restrictive regime to a liberal trade policies. The various forms of foreign capital flowing into India has helped to bring in huge amounts of Foreign Direct Investment (FDI) into the country, which in its turn has given a major boost to the Indian economy.

• According to International Monetary Fund (IMF), FDI is defined as “an investment operating in an economy other than that of the investor.” The investor’s purpose is to have an effective voice in the management of the enterprise (IMF, 1977).
• FDI is the process by which the residents of one country (the source) acquire the ownership of assets for the purpose of controlling the production, distribution and other productive activities of a firm in another country (the host country).


... middle of paper ...

...relation to test the statistical significance of the association between FDI and GDP (in service sector). Correlation helps to measures the strength and direction of a linear association between two variables. For any two variable s X and Y, the correlation coefficient between them is given by-



After putting the data of table 5 in Excel I find out the correlation between the FDI inflow in India and percentage growth of GDP (in service sector). The estimated result of Correlation Analysis tells us the association between FDI inflows and GDP (in Service Sector) is 0.788 which is positive.

From the above result it is quite evident that the relation between the FDI inflow and GDP is more than moderately positive. and significant at 0.01% level of significant. And confirms the positive correlation between the two.

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