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Essay on Foreign Collaboration

Essay Contents:

  1. Essay on the Need for Foreign Collaboration
  2. Essay on the Contribution of Foreign Capital
  3. Essay on the Arguments in Favour of Foreign Capital
  4. Essay on the Arguments against Foreign Capital
  5. Essay on the Foreign Investment in Recent Years
  6. Essay on the Dangers of Private Foreign Capital
  7. Essay on the Government’s Policy in Regard to Foreign Capital
  8. Essay on the Instruments of Industrial Growth
  9. Essay on the Problems of Foreign Aid

Essay # 1. Need for Foreign Collaboration:


Lack of capital is a serious handicap in the way of economic development of underdeveloped countries. The internal resources are not sufficient, so they have to rely on foreign capital in the initial stages of their development. The pace of economic development primarily depends upon the rate of capital formation. But in the underdeveloped countries the per capita real income being very low, the rate of saving investment is very low.

Therefore, these countries are obliged to depend upon external sources of capital for initiating them process of economic development.

External capital cards in the form of (i) direct business investment commonly called, private foreign capital and (ii) international loans and grants more commonly known as foreign aid or external assistance.

In the earlier years more direct business investment was the major form of foreign capital. The private industries and multinational corporations made direct investment in various fields of economic activities—agriculture, industries, plantation, mining, etc. in the underdeveloped countries.


However, the flow of direct business investment or foreign capital has declined in the recent years and therefore, now the major form of foreign capital comes by way of international loans and grants. At one time there was great opposition to the use of foreign capital in India. It was said there was the danger of domination and economic exploitation.

Essay # 2. Contribution of Foreign Capital:

The underdeveloped countries are always capital scarce countries and that is a perpetual need of capital for economic development projects. The degree of dependence on foreign capital depends on the extent to which domestic resources could be mentioned. India has required foreign capital to speed up economic growth.

There was considerable opposition to the use of foreign capital in India. This was mainly due to the political role it played in the past. The colonial empires of the 19th and 20th centuries were built by European countries on the basis of trade and identity. The Government of India at one time was subjected to the pressure of foreign companies and foreign government.


Essay # 3. Arguments in Favour of Foreign Capital:

India is a developing country, and has adopted the path of economic planning for growth. Her natural resources and labour force are in abundance but there is lack of capital. Our technological knowledge is outdated and industrial productivity is very low under these circumstances, the importance of foreign capital increases.

This can be explained as under:

1. Encouragement to Domestic Savings:

In a developing country like India the level of domestic savings is low because of low income of the people. Naturally it suffers from scarcity of investment and in this way is caught in the vicious circle of poverty. With the help of foreign capital, the savings and investments can be pushed up.

2. Proper Exploitation of Natural Resources:

India possesses abundant natural resources but due to lack of technological knowhow and capital, the natural resources cannot be properly exploited. Thus it is necessary that the help of foreign capital is sought in order to accelerate the pace of economic development.

3. Availability of Foreign Technology and Managerial Techniques:

Developing countries also lack new technology and modern scientific managerial techniques. With the help of foreign capital these can also be gained. This process is essential for the economic development of the country.


4. Establishment of Basic and Key Industries:

Basic and capital intensive industries cannot be set up for want of sufficient capital. The domestic capital is shy and does not come forward. Thus foreign capital can easily contribute to the development of such industries. Economic history of India is an evidence that foreign capital has played a vital role in the establishment of basic and key industries.

5. Solution of Unemployment Problem:

Unemployment is increasing constantly in India was the help of foreign capital. New industries can be set up and chance of expanding the old ones also increase. Thus the level of employment opportunities also increase.


6. Lack of Enterprising Spirit:

In an underdeveloped country like India, capital is shy. Capitalists are apprehensive of investing this capital in risky enterprises. Foreign capital is welcomed to face the initial rests.

7. Control over Inflation:

India needs more money for its economic growth. So she has been adopting a policy of deficit financing. This leads to increase of money in circulation and the prices level goes up. Thus a state of inflation arises (High prices) foreign capital including capital goods, machinery and equipment can easily control and check inflation.


8. Helpful in Accelerating the Pace of Economic Development:

To accelerate the pace of economic development the policy of comprehensive economic planning has to be followed. Its need cannot be met with domestic reasons. Thus foreign capital becomes essential in boosting the level of capital formation.

9. Improvement in the Balance of Payments Position:

In the early stages of economic development of India machines, equipment and raw materials had to be imported. This led to adverse balance of payments. If India imports foreign capital it can make the balance of payments favourable in the short run as well as in the long run.

Essay # 4. Arguments against Foreign Capital:

1. Obsolete Machines of Technology:


Foreign capital is responsible for obsolete machines and technology being passed on to Indian partners by the foreign collaborations.

2. Dependence on Foreign Countries:

Foreign collaboration has made Indian industries dependent to a considerable extent on imports and intermediate goods and parts of machinery. It has destroyed self-reliance.

3. Foreign capital offer Prize Posts and superior jobs to their own nationals. They disregard the claims of highly qualified Indians and thus follow the policy of discrimination.

4. Foreign capital derives the industrial profits out of the country. This may lead to the exhaustion of country’s valuable resources and the progressive impoverishment of the country.

5. Foreign capital and enterprise brings about economic development by the foreigners. Economic domination may entail political domination in some form. Foreign capital may thus give rise to vested interests which may oppose the political and economic advancement of the country.


6. Foreign capital bound to beat to great dependence on foreign countries. This may, it is apprehended, impede the attainment of socialist pattern of society.

7. Foreign capital can prove highly prejudicial to national defence if have and key industries are monopolized by the foreigners.

These are the disadvantages that accrue to the country from the use of foreign capital. But in spite of strong reaction in the country against the import of foreign capital we have to consider our need to foreign capital in the light of requirements of a backward country like India.

Essay # 5. Foreign Investment in Recent Years:

Till the end of 1980, foreign investment was generally allowed only in areas of hi-tech sophisticated industries and Indian industries which were in a position to export substantial part of their production. The normal ceiling for foreign investment was then 40 per cent of total equity capital of companies, though a higher percentage of foreign equity capital was favoured in private sector industries, if the technology was highly sophisticated and not available in the country, or if the industrial unit was largely export-oriented.

New Liberal Policy:


Government of India has adopted a more liberal policy in regard to foreign investment in India as part of the New Industrial Policy of July 1991.

The new regime of foreign investment contains the following:

(i) As against the past policy of considering all foreign investment on a case-by-case basis and that too within the normal ceiling of 40 per cent of total equity investment, the new policy provides for automatic approval of direct foreign investment up to 51 per cent foreign equity holding in 34 specified high priority, capital-intensive hi-technology industries provided the foreign equity covers the foreign exchange involved in importing capital goods and outflow on account of dividend payments are balanced by export earnings over a period of seven years from the commencement of production;

(ii) Foreign technology agreements are also liberalised for 34 industries with industrial units left free to negotiate the terms of technology transfer without the need for prior Government approval for hiring of foreign technicians;

(iii) Foreign equity holdings up to 51 per cent would be permitted for foreign trading companies with a view to exploit world markets adopting professional marketing activities; and

(iv) Boards of Investment Promotion has been set up to look into large foreign investment projects and expedite their approval or non-approval.



Though as a consequence of the new liberal economic and industrial policy of July 1991, much foreign equity investment was expected to flow into India, the response though increasing to some extent, has not been as expected.

The main reason is that in spite of the announcement of the liberal foreign investment policy, persistence of bureaucratic cobwebs and delays and sticking to rules and regulations still persist obstructing free and abundant flow of foreign equity capital into India. Also Western countries with funds to invest abroad have different priorities such as increasing investments in East Germany. Taiwan and some other Asian countries where there is political stability and greater chances of financial success.

Essay # 6. Dangers of Private Foreign Capital:

From the Indian experience since her independence, the following dangers of private foreign capital operating in India (through their Indian collaborators) have come to be noticed:

1. Foreign companies from the West European countries and from the United States are generally reluctant to enter into collaboration with public sector companies (i.e. Government companies) in India, mostly on ideological grounds. If insisted to do so, they would rather not come to India than offer their participation with the Public Sector Indian companies.

2. In certain areas of industrial production, Indian technology is fairly well developed. Collaboration with foreign companies in low priority areas like cosmetics and luxury goods has only meant duplication of technology which is unnecessary and often costly. Indian companies or entrepreneurs have the necessary technology in such low priority industries which means any collaboration in such areas is superfluous.

3. The rate of return on initial foreign investments in India is very high, making it possible to return the entire amount of foreign investment within 2 to 4 years. It is, therefore, argued that unless foreign collaboration agreements help to increase India’s exports and result in decrease in dependence on foreign countries for imports, outflow of foreign exchange might far outweigh initial gain from foreign collaboration agreements.

4. Often technology that is passed on by private foreign collaborators of Indian partners is obsolete on not appropriate to Indian conditions; often import of capital equipment was far in excess of India’s requirements. Thus, technology appropriate to Indian conditions or development of such technology in Indian itself through collaboration with foreign companies has not become possible to any very great extent.

5. It is noted that royalty payments and fees for technical services rendered by foreigners all result in increasing claims on India’s foreign exchange earnings and reserves which are relatively small in relation to the country’s requirements. One estimate is that total outgoings due to private foreign collaboration agreements were more than the inflow of foreign capital. For example, Coca Cola with a small investment of foreign currency used to send abroad many times that amount annually by way of profit until permission to continue its activities was refused to the country.

The same is true of the US oil companies like of ESSO and Caltex. For example, the ESSO with an investment of Rs. 30 crore (with Indian holdings of only Rs. 57 lakh) took away from India profit (in foreign currency) of Rs. 83 crore during 1968 to 1970 only.

6. On the whole, the impact of foreign private collaboration on India’s balance of payments has not been favourable. The main reason for his has been the substantially high level of imports consequent on foreign collaboration agreements as compared to the low level of exports, such foreign collaborations hardly adding to India’s export earnings.

For long under the private foreign collaboration agreements, as excessive number of technicians, often not suitable to Indian conditions were sent to India and designs and machines were not suitable to Indian conditions; but under the agreements, they were imposed on India.

7. There is also the myth of the policy of Indianisation. Under Section 29(1) of the Foreign Exchange Regulation Act, all foreign companies are required to dilute their ownership to 74 per cent and under Section 29(2) of the FERA, the Indian branches of foreign companies are to be converted into Indian companies with non­resident share in equity capital not exceeding 40 per cent.

It is observed that the dilution of equity form 100 per cent to 74 per cent (or from 100 per cent to 40 per cent) has hardly made any difference to the drain of foreign exchange from India to foreign countries in which the head offices of foreign collaborations are situated.

It is observed, for example, that Ponds and Warren Tea were able to send home net worth of their company’s investment every two years. In the case of Colgate-Palmolive, the highest limit of profit was 89 per cent which meant that the entire net worth of assets invested in India was repatriated within less than 14 months.

The new issues of such companies are excessively oversubscribed on the pretext of broadening the Indian of these companies are able to raise plenty of local capital and the Indian Shareholders with their personal interest only in view and in dividend, provided support to the functioning of multinational companies whenever the bogey of expropriation was raised in Indian Parliament.

It was not the existing equity capital that was shared with India national, but the new equity that was issued to Indians. The Indian shareholders were scattered all over India and even if they wanted, they could not take any concerted action against the policies of the company. In fact, Indian shareholders were only interested in dividend and hardly took any interest in the functioning of the company. Thus, the domination of foreign collaborators continued unabated in India.

The myth of Indianisation can be exposed by the fact that foreign partners or the parent companies in their collaboration agreement retained the absolute power of appointing chairman and managing directors of their Indian subsidiaries even when the dilution of shareholdings was brought down to 25 per cent.

It is also observed that by adopting the practice of wide dispersal of equity holdings and ownership rights, the foreign collaborators have also significantly blunted Indian people’s opposition to multinational foreign companies with subsidiaries in India while repaying very high returns on their investments.

It may be said that garb or covering of Indianisation is being cleverly exploited by many foreign multinational companies to convert the business environment in India in their favour and thus continue to make and transfer home enormous profits made in India annually.

Michael Kidron has estimated that during 1948 to 1961, foreign companies as a whole had taken out of India total funds worth three times their investments in India. It may be said that the situation did not change much during the 1970s.

8. Instead of allowing foreign private capital and its participation on a selective basis and only in the case of essential capital equipment and other essential inputs, foreign collaboration agreements were permitted out of overenthusiasm to bring foreign capital into India into lines of production of commodities such as chewing gum, cosmetics, boot-polish, cigarettes, hotels and so on.

Though government assumed powers under the FERA, no concrete results have followed and foreign companies continue to make enormous profit in India and remit them to their mother countries as before.

Essay # 7. Government’s Policy in Regard to Foreign Capital:

After India became independent in August 1947, Jawaharlal Nehru, the then Prime Minister of India, made a statement in April 1949 giving the following assurances to foreign capital:

1. There would be no discrimination between foreign companies and purely Indian companies which meant that foreign capital would get the same treatment as indigenous capital.

2. Foreign investors would be permitted to remit profits and repatriate capital, taking into consideration India’s position in regard to availability of foreign exchange.

3. In case a foreign company was nationalised, fair and equitable compensation will be given to foreign investors.

The above policy was based on several considerations. There was a shortage of indigenous capital and that needed supplementing by foreign capital, if rapid industrial and economic development were to be brought about. Also, there was need of capital goods and equipment and technical know-how from abroad as India then lacked these essential requisites of growth and development.

Tax Concessions:

In the initial stages, with a view to attract foreign capital (that is, foreign companies) to India, Government offered various tax concessions and to avoid delays in finalising foreign collaboration agreements, streamlined its licensing policy of procedures to quickly approve foreign collaboration agreements.

In 1961 the Indian Investment Centre was opened, the objective being to bring together Indian and foreign businessmen and appraise foreign investors of the vast business opportunities in India.

In 1972 the Government of India took another major step to attract foreign capital into the country. It permitted wholly-owned subsidiaries in India of foreign companies, provided they undertook to export 100 per cent of their production.

Export Liability:

If the export liability was less than 100 per cent of its output, the extent of permissible foreign capital was to be decided by negotiations between the foreign companies and the Government of India.

Thus, the Government of India had to choose between the Indianisation of foreign subsidiary companies in India or boosting up export through their help. Government preferred the second of the above two possible courses. But Government’s choice of the second policy was beset with many difficulties.

What if export targets laid down were not fulfilled by foreign companies? Have not, with the promise of boosting, exports, a large number of foreign companies opened their branches or entered into collaboration agreements with Indian companies, thus dominating the Indian industrial scene, making the country dependent on foreign countries and creating problems of balance of payments?

Limits on the Role of Foreign Capital and Foreign Collaboration Agreements:

While for a developing country like India, foreign capital as also foreign technical knowledge are important for the industrial development of the country, there are clear limits on the use of foreign capital and on foreign industrial collaboration agreements as instruments of industrial development in a country like India.

The limits on the above two or on the absorptive capacity of foreign capital and technical know-how for industrial development in a country like India are fixed by considerations such as availability of industrial raw materials in the country, level of industrial and economic development already attained, availability of skilled personnel in the country, availability of various infrastructural facilities, the extent to which industrial and commercial projects are prepared or can be prepared with speed, availability of local or indigenous capital, experience of Indian companies in the industrial and commercial fields and their willingness to enter into industrial collaboration agreements, capacity of the country to pay servicing and other charges in foreign currencies to foreign collaborators, political stability and political ideology governing industrial and economic policy of the government of the country, willingness of foreign investors and companies to enter into collaboration agreements with local companies (which depends upon the extent to which Indian companies inspire confidence among foreign investors and foreign companies) and above all, on Government of India’s policy in regard to foreign capital and foreign collaboration agreements in the industrial field.

Essay # 8. Instruments of Industrial Growth:

1. World Bank Loan:

Due to an unprecedented drought in the country in 1987-88, the World Bank has agreed to give India a loan of dollar 350 million to help India to pay for the imports necessitated by the drought. This is in addition to a dollar loan from Japan amounting to 200 million.

The crucial point is that, for the first time, India is borrowing from international lending institutions to pay for current consumption. In the past such borrowing were intended for creating assists that would be productive in future, and thereby enhance the country’s capacity to repay the loans in future. Now, however, India has taken another step towards the dreaded debt trap.

2. External or Foreign Debt of India—Latest Position:

Economic Survey of the Government of India for 1991-92 has following things to say about India’s foreign or external debt:

“India’s medium and long-term external debt, consisting of external assistance on Government and non-Government accounts external commercial borrowings and the IMF -liabilities amounted to Rs. 1,004 hundred crores (i.e. US dollars 51.1 billion) at the end of 1990-91 and constituted about 19 per cent of GDP. Including NRI deposits, the country’s external debt (other than short-term debt) stood at Rs. 1,212 hundred crores (US dollars 61.7 billion) constituting about 23 per cent of GDP. Adding the estimates of short-term debt of maturities to one year, India’s aggregate external debt amounted to Rs. 1,307 hundred crores or US. dollars 66.5 billion on march 31, 1991 which was around 25 per cent of the country’s GDP.”

3. External Assistance or Foreign Aid:

In recent decades, particularly after the World War II, whereas the flow of private foreign capital to the underdeveloped countries has gone down sharply, that of public development assistance (foreign aid), both from the individual national governments and multinational donor agencies (like IBRD, IDA, etc.) has gone up tremendously. Foreign aid or external assistance is that flow of capital funds to the underdeveloped countries whose objective is non-commercial from the point of view of the donor agencies. Further, such assistance is characterised by concessional terms i.e., it has a low rate of interest and its repayment period is considerably large.

These ‘softer’ terms of borrowings of foreign aid are in contrast to commercial borrowings which have high interest rate and stringent repayment schedule. During nearly five decades of her planned economic development, India has utilised substantial quantities of foreign aid. In the First Five Year Plan, the need for external assistance was not felt to greater degree because we heavily relied on the withdrawal of our accumulated foreign exchange reserves for supplementing the domestic capital.

The withdrawal of our foreign resources continued right till the middle of 1958, when they became so low that they were not considered sufficient even to meet the minimum requirements of the economy. It was at this time that the need for procuring foreign capital was urgently felt and the friendly countries along with the international institutions like the l. B. R. D. were approached for help. Ever since that time, there has been a continuous flow of external assistance to India which has come in the form of (a) loans, (b) grants, and (c) aid under U.S. Public Law 480 commonly known as PL 480 which was discontinued around the year 1971-72.

4. External Assistance- Authorization and Utilisation:

The total external assistance authorised to India till the end of March 1998 amounted to Rs. 1,82,319 crores, of which Rs. 1,61,326 crores or 88.5 per cent of the total authorisation were in the form of loans and Rs. 18219 crores or 10 per cent of the total were by way of grants, Rs.2,774 crores or 1.5 per cent being in the form of PL 480/665 U.S. assistance to India.

The actual Utilisation of total assistance of the end of March 1998 amounted to Rs. 1,29,352 crores which was only about 71 per cent of the total authorised assistance. In the total, aid utilised loans accounted for Rs. 1,13,851 crores (88 per cent of the total, assistance utilised) and grants Rs. 11,682 crores (9 per cent of the utilised assistance). The balance Rs. 2,819 crores (3 per cent of the total utilisation) was PL 480/665 assistance which was fully utilised by the end of 1971-72.

5. Aid in Pipeline:

Aid available in pipeline represents assistance committed over the years which has remained undisbursed and is available for disbursement in future. Total aid in pipeline, both in the form of loans and grants, amounted to Rs. 52,967 crores at the end of March 1998. The World Bank group’s share in the total undisbursed loans was over 50 per cent.

6. Low Utilisation of Aid:

Not only there is a decline in the quantum of fresh aid, but also the country has not been able to fully utilise the already committed aid. Utilisation of total authorised aid upto the end of March 1995 was only about 70 per cent. Among the reasons for lower utilisation are inadequate provision of matching rupee resources from the Government organisational and administrative inefficiency; undue delay in completion of projects, etc.

Cost-overruns consequent to inordinate delays in completion of projects in critical areas have not only slowed down timely utilisation of aid available in the pipeline, but has also started adversely affecting fresh commitments by donors.

7. Source-Wise External Assistance:

India has been receiving assistance from a number of countries/country groups and international agencies. As at the end of March 1998.the share of World Bank Group (IBRD and IDA) in the total authorisations was 42.8 per cent. Japan has emerged as the second largest contributor (16.2 per cent) followed by the Asian Development Bank (9.1 per cent). Among the other major donors are the U.K., Germany and the OPEC Group.

Essay # 9. Problems of Foreign Aid:

External assistance, which plays a crucial role in the economic development of the underdeveloped countries, has also some problems that dilute its good impact. Foreign aid is largely uncertain and fluctuating and, therefore, it becomes difficult to plan your development by placing much reliance on such aid.

It has been seen that the quantum of foreign aid has not much relation with the requirements and absorption capacity of the aid receiving country as much of it is governed by the political considerations. And then the tied-aid, which is the common form of aid these days, restricts the country’s choice of projects or choice of markets for import of necessary goods as the donor countries give aid only for specific projects on the condition that the equipment and machinery required for these projects will be bought only in the market of the donor country.

This naturally reduces the impact of such aid as the prices of goods in the donor countries may be higher and their technologies inappropriate for underdeveloped countries. Another problem of foreign aid is the debt-servicing burden it imposes. Interest has to be paid regularly and installments must be paid on time. All these payments have to be made in foreign currency.

With the meager export earnings of the underdeveloped countries such debt servicing may consume a substantial proportion of their export- earnings. For example, debt servicing payments in India now use almost 30 per cent of our export earnings. This leaves less foreign exchange for importing other essential items required for development. Thus, foreign aid is not an unmixed blessing; it has its evil consequences as well.