FINANCING ECONOMIC DEVELOPMENT BY FOREIGN

SAVINGS
Countries in development, because of the low gross
domestic product and low rate of savings, are unable to
provide necessary recourses for financing the
investments from domestic production. Because of that,
they are forced to provide part of the resources for
financing the economic development abroad.
In most developing countries economic and social
infrastructure is underdeveloped. These countries have
some expressed problems like health care, education,
traffic, telecommunications, production and distribution
of electric energy.
Foreign saving can be used in many different purposes.
Usually is used in form of the investments as well as to
reduce external indebtedness. Developing countries
often tries to attract foreign investment by incentive
programs.
Foreign savings can be help to domestic savings when it
comes to financing investments and supporting
economic development. Engagement of foreign savings
for financing a development can be divided according to
different criteria. Depending on the economic function
we distinguish compensatory and non compensatory
(autonomously) movement of the foreign capital.
Compensatory movement of the foreign capital is direct
engagement of the state authorities in order to use
foreign saving for financing an economic development.
Non compensatory or autonomous form of movement of
the foreign savings is a situation when banks, companies,
and even individuals, in accordance with their own
preferences and evaluations, act on the forms and flows
of engagement of foreign savings.
According to ownership criterion, foreign investments
can be:
-public
-private
This division is made depending on whether the investor
is a private institution or a government of a foreign
country. Private investors can be: foreign companies,
banks and other financial institutions, respectively
foreign individuals.
Private sources of saving can be in form of:
-Foreign direct investments
-Portfolio investments
-Banking loans and commercial credits
Foreign direct investments represent optimal form of
engagement foreign capital in process of financing
economy development. By the rule that means that the
foreign investor with its own investment, acquired the
right of ownership over the one part or over the whole
company in host country.
It is considered that there is a permanent stake if the
direct investor took over at least 10% of the common
stocks or voting rights in the company of direct
investment.
According to the country of investor and destination,
foreign investments can be divided to:
b) ‘internal’ foreign direct investment, or foreign direct
investments in observed national economy
a) external foreign direct investments, or foreign direct
investments abroad.
Bilanced, ‘internal’ foreign direct investment represent
inflow, and external foreign direct investments represent
outflow of the capital from one country.
Flows of the direct investments are the new investments
made during the observed period. Overall flows can be
divided according to type of instruments used at
investments, and they represent:
-ownership capital which includes ownership in
branches and all stocks in dependent and associated
companies
- reinvested earnings which represent part of the
investor’s earnings which is not distributed from the
company of the direct investment
-remaining capital which includes mortgaging and
crediting funds, including financial debt instruments and
commercial loans between the investors and foreign
direct investments companies.
Income of the foreign direct investments represent
income attributed to direct investors during the period,
namely to the increase of income. It is shown at the
checking account of the payment balance. It is divided to
three categories: dividends, reinvested earnings and
interests on loans.
According to the purpose of investments and the type of
the relationship which is established between the parent
firm and its branches abroad, foreign direct investments
are divided into three groups:
1) Horizontal or market-oriented
2) Vertical or Resource-oriented
3) Conglomerate or export platforms of the foreign
direct investments which can have elements of the
horizontal and vertical
Foreign direct investments can also be divided into:
-brownfield which means takeover of already existing
firms or its parts
-greenfield which represent a whole new investment,
that is, they mean to establish a new enterprise.
Special forms of foreign direct investments are:
a) Concession (buying for a limited period of time of
rights to use natural resources or goods in general use
for the performance of activities of general interest)
b) B.O.T. (Build-Operate-Transfer) jobs that imply
approval to foreign investors to build and use certain
object, installation or plant.
Portfolio investments are a form of capital investment
which is done by investing in bonds, coupons, and the
general effect issued by foreign governments and its
organs as well as other investments, foreign banks, or
companies that were issued to raise funds on an
international capital market.
In other words, motif of this investments is just profit,
but not control of managing, like the case of foreign
direct investments.
Portfolio investments are different from foreign direct
investments in the fact that there is a shorter term of
investment, as well as in the portfolio investments,
investors are mainly financial institutions, institutional
investors or individuals.
Banking loans and credits
Loans and credits are approved by:
-commercial banks
-international financial institutions
-organizations for financing exports deals(sometimes
companies)
Commercial banks approve two kinds of credits:
1) Credit lines (Revolving credit facilities)
2)Terms loans
Institutions like International Monetary Fund, an affiliate
of the World Bank and various regional banks, approve
multilateral loans. International Monetary Fund gives
short-term and medium-term loans which usually
function as a funding the balance of payments, filling up
foreign exchange reserves in order to maintain stabile
course of national exchange rate.
International financial institutions are one of the main
sources of financing of the developing countries.
Funds that International Monetary Fund provides can not
be invested in companies, building factories,
infrastructure etc.
World bank, in contrast to International Monetary Fund,
invest directly in projects which stimulate long term
develop of national economies.
The first institution for securing credits in the world was
founded in Switzerland, 1906.
Export credits can be: commercial and commodity.
Commercial credits are approved by companies of
manufacturers of equipment and construction works,
while commodity credit are approved by banks to the
seller. or directly to the buyer.