### 2. FOREIGN CAPITAL AND FWG PATTER OF ECONOMIC DEVELOPMENT

### 2.1 Financing FWG pattern economic development

For newly introduced industry to achieve successful FWG pattern development, cost of production should be reduced to an internationally competitive level, by realizing the learning effect of production (at the stage of “introduction” of FWG pattern development cycle) and economy of scale in production (at the stage of “inportsubstitution and export growth” of FWG patter development cycle) $ ^{8} $ . The questions to be considered are what type of capital is demanded for the realization of these factors, how such capital can be financed, and what role foreign capital is expected to play.

First, the characteristic of the fund demanded depends on the type of newly introduced industries. In general, light industries have a smaller optimal size of production and use simpler technology than heavy industries. Thus investments in light industries have a shorter digestion period and a smaller minimum optimal size than those in heavy industries. In general, the longer the digestion period of an investment project and the larger the size of investment, the more risky the project of investment. Secondly, the characteristic of the fund demanded also depends on the technological gap between the newly introduced industries and existing industries. The wider the gap, the more risky it is to invest capital in the newly introduced industry. Thirdly, the risk of investment projects is affected by who manages and operates the projects. If the new investment projects are conducted by foreign companies, with enough managerial and technical skill, through the form of foreign direct investment, the risk accompanied by those projects would be significantly lower than the case in which the same investment project is done by domestic companies without experience.

The first problem of financing new industry is the level of domestic financial resource mobilization $ ^{9} $ . In the less developed economy, where the level of per capita financial savings is low, savers are quite risk averting. Moreover, in these economies, financial markets are less developed and as a result the ability of resource mobilization is lower than in developed economies. Therefore, since the risk of investment in newly introduced industry is high in these countries, it is not easy to raise funds for investment at the market base. Because of this, in many developing countries, governments allocate financial resources to targeted industries, using various policy based credit lines, so as to supply the additional funds to them.

Foreign savings is an alternative source of funds for financing development $ ^{10} $ . However, capital flow from developed countries to developing countries is obsessed by the high riskiness of the investment, caused by the difficulty of collecting investment information, the underdevelopment of the financial system in these countries, and various types of economic and non-economic uncertainty. Developing countries governments therefore use a wide variety of policies promoting foreign investment. One type of policy intends to reduce the riskiness of investment to the investors in developed countries. The offer of government guarantees for foreign borrowings is one of the typical and classical policy measures. The recent development of financial sector liberalization is also intended to reduce investment risk by providing better access to information, a wider range of operations, and improving the transparency of the system. Relaxation of controls on foreign direct investment and deregulation of foreign exchange controls are also categorized into this type of policy. Another type of policy, intended to make investment projects more profitable and to raise the