Foreign Capital and its types

1. Understanding
Foreign
Capital and its
types

2. Foreign Capital
The term foreign capital is referred to the inflow of capital into the
home country from international countries. In this article, you will
get to know all about foreign capital, foreign investments, mainly
foreign direct investment.
The governments of every country around the world look forward to
attracting a sufficient amount of foreign capital as it plays a
constructive role in the economic development of the country.
Here, foreign capital is defined as the inflow of capital into the
home country from international countries.
The reason why the need for foreign capital arises in developing
countries like India is that here domestic capital proves to be
inadequate for economic growth. Foreign capital is viewed as a
medium using which the gap between the domestically available
supply of savings, government revenue, foreign exchange, and the
planned investment can be filled to achieve the country’s
development targets further.

3. Different forms of Foreign Capital
A country can receive foreign capital in three different forms- foreign
investment, concessional assistance, and non-concessional assistance.
Foreign Investment: There are two types of foreign investments-
Foreign Direct Investment (FDI) and Foreign Portfolio Investment
(FPI). It is the foreign investment that helps the country meet the
gap in management, technology, skill, and entrepreneurship.
Non-Concessional Assistance: This form of foreign capital consists of
External Commercial borrowing (ECBs), deposits received from
Non-Resident Indians (NRIs), and loans from the governments of
international countries.
Concessional Assistance: This particular form of foreign capital
consists of the loans and grants obtained on a bilateral basis from
multilateral agencies like the International Monetary Fund (IMF),
the World Bank, etc.

4. Types of Foreign Investments
Funds from foreign country could be invested in
shares, properties, ownership / management or
collaboration. Based on this, Foreign Investments
are classified as below.
 Foreign Direct Investment (FDI)
 Foreign Portfolio Investment (FPI)
 Foreign Institutional Investment (FII)

5. Foreign Direct Investment (FDI)
FDI is an investment made by a company or
individual who us an entity in one country, in
the form of controlling ownership in business
interests in another country.
FDI could be in the form of either establishing
business operations or by entering into joint
ventures by mergers and acquisitions, building
new facilities etc.

6. Foreign Portfolio Investment (FPI)
Foreign Portfolio Investment (FPI) is an
investment by foreign entities and non-residents in
Indian securities including shares, government
bonds, corporate bonds, convertible securities,
infrastructure securities etc.
The intention is to ensure a controlling interest in
India at an investment that is lower than FDI, with
flexibility for entry and exit.

7. Foreign Institutional Investment (FII)
Foreign Portfolio Investment (FPI) is an
investment by foreign entities in securities, real
property and other investment assets. Investors
include mutual fund companies, hedge fund
companies etc.
The intention is not to take controlling interest,
but to diversify portfolio ensuring hedging and
to gain high returns with quick entry and exit.