Inflow of Private Capital and Choice of Planning Strategies

International flow of private capital can be seen as a situation wherein a variety of conflicting interests are involved. The interests of the government of the country in which foreign investment takes place, do not concur with the interests of the foreign private investor. The interests of the foreign private investor and those of the government of his own country can be mutually conflicting ones, since the private profitability of an investment project differs from its social desirability. The interests of the government of the capital exporting country and those of the government of the capital-importing country, can also be at variance with each other. Our attention here is confined to analyse the first category of conflict of interests, in which the foreign private investor and the government of the capital importing country are the two policy-makers. In this situation, interests of one policy-maker are affected by the choice of planning strategies by the other policy-maker and each wants to choose his strategies so as to “optimise” his interests. The purpose of this paper is to demonstrate the usefulness of Game Theory approach in arriving at the “best” planning strategies open to the two policy-makers involved. In the immediately following two sections, we describe the interests of the foreign private investor and those of the government of the capital-importing country (hereinafter called the domestic planner). In the remaining sections, we discuss the problem of optimum policy making as a two-person non-zero-sum game, with the domestic planner and the foreign private investor as the players of the game. The appendix gives the mathematical formulations of the game model and its solutions.