Question

Capital Flows such as foreign direct investment (FDI) and foreign aid supplement domestic resources for the economic development of Less Developed Countries (LDCs). However, FDI is regarded to be more costly than beneficial to developing countries for the development process.

1. (a) Discuss strategies that LDCs might adopt to make foreign investment fit their development aspirations better, without destroying all incentives for foreign investment. Give various country examples to support your answer.

2. (b) What are the motivations for giving foreign aid to developing countries? What are some of the important areas foreign aid can be used to assist the economic and social needs of the nations?

3. (c) What are some of the differences between official development assistance (public aid) and private development assistance from nongovernmental organizations (NGOs)? Which type of aid is more desirable from the perspective of recipient

4. (i) How important is foreign aid for developing countries in relation to other sources of foreign exchange?

5. (iii) What are some of the important areas that foreign aid and foreign investment can be used in developing countries to assist the needs of these countries?

Answer 1

1a) Strategies that LDCs might adopt to make foreign investment fit their development aspirations better, without destroying all incentives for foreign investment are:

• Foreign investments should be used in long term infrastructural projects like building roads and bridges so that economic development process gets speed up. As a result foreign investors can earn higher returns in long term.
• For example: Foreign investors investing in developing countries like Indian market gets benefited as the returns on investment is quite higher.

2. (b) The motivations for giving foreign aid to developing countries are:

• Returns on investment should be higher as more new projects will come up in developing countries
• Global market will march toward attainment of some kind of stability

Some of the important areas foreign aid can be used to assist the economic and social needs of the nations are:

• Meeting poor people's basic needs
• Providing proper educational facilities
• Healthcare facilities

3. (c) Some of the differences between official development assistance (public aid) and private development assistance from nongovernmental organizations (NGOs) are:

• Official development assistance is provided by the government or agencies of the government, whereas, private development assistance is been provided by the non-governmental organizations(which may include, multinational corporation, epistemic communities, humanitarian organization, etc)

Type of aid is more desirable from the perspective of recipient is Official development assistance(government assistance) as government is mainly held responsible for promoting welfare.

4. (i) How important is foreign aid for developing countries in relation to other sources of foreign exchange?

Answer: Foreign investors who provide the foreign aid are the key players in any developing country's economy. Foreign investors include many institutions as well as individuals or body of individuals who invest in foreign country. Foreign aid for developing countries in relation to other sources of foreign exchange is the most important as it helps to speed up thee economic development of a developing nation.

5. (iii) What are some of the important areas that foreign aid and foreign investment can be used in developing countries to assist the needs of these countries?

Answer: Some of the important areas that foreign aid and foreign investment can be used in developing countries to assist the needs of these countries are:

• Banking and financial sector
• Infrastructural and transportation sectors
• Tourism sector