International Capital Flows

10 Key excerpts on "International Capital Flows"

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  eBook - ePub

  International Economics

  A Heterodox Approach

  • Hendrik Van den Berg(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  over time, that is, transactions that involve a payment or payments in one period or periods of time in exchange for an expected, or hoped for, receipt or set of receipts in some other period or periods of time. Explicitly or implicitly, finance consists of borrowing and lending, which implies the creation of real or financial assets. International finance thus deals with those intertemporal transactions that cross borders. Of course, some international financial transactions may be related to purchases of physical capital, but the world’s international financial flows also include massive international flows of money for purchasing financial assets.

  The previous chapters showed how international trade has grown rapidly over the past 60 years, at least until the worldwide recession in 2007 and 2008 caused trade to decline for the first time since the close of World War II. International investment and financial flows have grown, on average, even more rapidly than trade, but their growth has been inconsistent. International investment and financial flows have fluctuated widely from year to year within all countries, and they have varied greatly among countries. Many countries, especially developing countries, often have suffered not just ups and downs in financial flows, but frequent reversals in the direction of such flows. Because such reversals cause very real reversals in economic growth and human welfare, one of the most ardent advocates of free trade, Jagdish Bhagwati, has suggested restricting International Capital Flows. In the same article from which the quote above is taken, Bhagwati (1998, p. 7) notes that “[e]ach time a crisis related to capital inflows hits a country, it typically goes through the wringer.”

  It is important to distinguish between investment in economic terms, which is the acquisition of physical capital, and the more popular meaning of investment

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  Global Imbalances, Financial Crises, and Central Bank Policies

  • Andreas Steiner(Author)
  • 2016(Publication Date)
  • Academic Press

    (Publisher)

  In the following subsections we use this definition to illustrate the magnitude of official relative to private capital. We first focus on capital flows and then turn to capital stocks.

  2.4.1. Capital flows

  The distinction between capital inflows and outflows is based on the residency of creditor and borrower (cf. Broner et al., 2013 ). Capital inflows are defined as net purchases (difference between purchases and sales) of domestic assets by non-residents. Capital outflows equal net purchases of foreign assets by domestic agents excluding the central bank. In particular, data allow us to distinguish between foreign direct investment flows, portfolio flows and other investment flows. Hence, capital inflows are the sum of inflows of foreign direct investment in the domestic economy, inflows of portfolio investment liabilities and other investment liabilities. Accordingly, capital outflows are the sum of outflows of foreign direct investment abroad, changes in portfolio investment assets and changes in other investment assets. In our measures of inflows and outflows we do not include capital account transactions because they contain development grants and remittances, which both do not reflect investments in a narrow sense. Official flows are defined as net purchases of reserve assets by the central bank plus development aid received.

  Figure 2.6 shows the magnitude of capital flows for geographic regions over the period 1970–2012. A common feature across regions is the strong increase in gross capital flows between the mid-1990s and the global financial crisis of 2008–10. To better visualize them, we present two graphs for each region that use different scales: The first up to the year 2000 (Asia 1995) and the second beginning in that same year, but using a larger scale.

  Figure 2.6 Capital flows (in billions of US$). Notes: Capital inflows are net purchases of domestic assets by foreigners. Capital outflows equal net purchases of foreign assets by domestic agents. Official flows are defined as net purchases of reserve assets by the central bank plus development aid received.

  Data source:IMF (2013)

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  Japanese Foreign Investments, 1970-98

  Perspectives and Analyses

  • Dipak R. Basu, Victoria Miroshnik(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  1

  Recent Trends in International Capital Flows

  Capital flows throughout the world in recent years have become more free and flexible than ever before. Immense amounts of capital are flowing between Japan and the United States. Some significant amounts, although much less than the Japan–U.S. flows, are between the developed countries and the developing countries. The economic significance of the later capital flows on the future of the world economy can be even more significant.

  In the 1970s, international banks were the most important players in the international capital. Massive amounts of petrodollars were transferred between the oil-producing nations and the borrowing countries during that period. In 1996, net international banks lending was $315 billion, whereas it was only $190 billion in 1995, but now the role of the banks has become smaller than what it was twenty years ago. Although Asian countries are still major borrowers, the direct investments, mergers, and acquisitions are now more important than ever. Recently, port-folio investments in bonds and equities became very important, accounting for more than half of the private sector capital outflows from the developed countries. Official purchases of bonds can be very important at the time of exchange-rate interventions.

  All these capital flows are normally very volatile. These are highly sensitive to the changes in the stock markets and changes in the balance of payments of different countries. Some of these flows reflect speculative activities in the foreign exchange markets and stock markets. For example, Japan was running balance of payments surplus; thus, these inflows were not required to finance current account imbalances there. During the first six months of 1996, about U.S.$44 billion flowed into the Japanese equity market with the view that the yen would be weaker than the dollar, and, thus, the Japanese corporate sector would be revived, which did not materialized. In fact, these capital inflows made compensating central bank purchases of U.S. treasury bonds essential in order to stabilize the yen against the dollar.

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  To identify markets that are expected to provide attractive investment opportunities, investors must analyze cross-country differences in such factors as expected gross domestic product (GDP) growth rates, monetary and fiscal policies, trade policies, and competitiveness. From a longer-term perspective investors also need to consider such factors as a country’s stage of economic and financial market development, demographics, quality and quantity of physical and human capital (accumulated education and training of workers), and its area(s) of comparative advantage. 1 This chapter provides a framework for analyzing a country’s trade and capital flows and their economic implications. International trade can facilitate economic growth by increasing the efficiency of resource allocation, providing access to larger capital and product markets, and facilitating specialization based on comparative advantage. The flow of financial capital (funds available for investment) between countries with excess savings and those where financial capital is scarce can increase liquidity, raise output, and lower the cost of capital. From an investment perspective, it is important to understand the complex and dynamic nature of international trade and capital flows because investment opportunities are increasingly exposed to the forces of global competition for markets, capital, and ideas. This chapter is organized as follows. Section 2 defines basic terminology used in the chapter and describes patterns and trends in international trade and capital flows. It also discusses the benefits of international trade, distinguishes between absolute and comparative advantage, and explains two traditional models of comparative advantage. Section 3 describes trade restrictions and their implications and discusses the motivation for, and advantages of, trade agreements

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  Introduction to International Economics

  • Henk Jager, Catrinus Jepma(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  These are all undoubtedly international financial centres, with London and New York being by far the largest. Three countries – the Cayman Islands, the Netherlands, and Ireland – are present only twice (both in Table 12.2): They are at best on the threshold of becoming international financial centres, but are a long way behind the four true global centres. 12.8 Summary 1. In terms of shares of the foreign-exchange (forex) market turnover, international flows of capital are much greater than international flows in goods and services, although it should be noted that forex market transactions are predominantly interbank transactions. 2. Classified on the basis of motives, international capital flows can usefully be divided into five categories: international trade credit, foreign direct investment, international arbitrage capital, international speculative capital, and international portfolio capi-tal movements connected with the need for risk diversification. In so far as capital transactions are linked to trade and investment, they are prompted by incentives in the real economy. The other three categories are principally the result of financial considerations. 3. Of the motives derived from the real economy, direct investment motives have already been discussed in Chapter 4. The same applies even more so in the case of interna-tional trade: many of the previous chapters have covered this subject. Insofar as trade is concerned, this chapter has therefore only outlined the nature of trade credits. These consist of export and import credits, often in the form of trade bills of exchange, which makes these credits negotiable. Consequently, an exporter, for example, need not wait 234 Introduction to International Economics for her money until the end of the term of her export credit. Documentary credit is a common form of import credit. 4. The most common forms of international arbitrage capital are foreign-exchange arbitrage and interest arbitrage.

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  Globalization of International Financial Markets

  Causes and Consequences

  • Hak-Min Kim(Author)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  2   Review of Literature A Brief Review of the Conceptual Approaches Most economists have been concerned with capital, but International Capital Flows did not become a major concern until relatively recently. Theories of capital flows developed in response to the internationalization of economic activities. There were four stages in this theoretical development. In the first stage, it was thought that International Capital Flows are unnecessary or disadvantageous. In The Wealth of Nations (1776), Adam Smith argued that capitalists prefer to invest their funds at home because of the uncertainty of foreign countries. 1 He warned that international capital transfer involves monopolistic behaviour by capitalists to eliminate the import of goods and to control local markets by producing the same goods in the foreign country. 2 He has little to say, however, about the determinants of International Capital Flows. In Money, Credit and Commerce (1923) Alfred Marshall supported Smith’s position that it is easier and safer to invest capital in the home country since it is easier to obtain information and to deal with legal conditions at home. He showed that domestic investments have ‘a great balance of pecuniary advantage as well as of sentimental attractiveness’ under conditions of ‘equal intrinsic merits’ of domestic and foreign capital investments. Marshall concluded that higher profit advantages by transferring capital to foreign countries and disadvantages of risks and difficulties in doing business in foreign countries are equal; thus, ‘net profits are kept nearly uniform throughout the country’ (ibid., pp. 9-11)

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  International Capital Flows

  • Martin Feldstein(Author)
  • 2007(Publication Date)
  • University of Chicago Press

    (Publisher)

  Europe also has been a net absorber of capital in most periods, and Japan the only consistent supplier. In recent years, capital flows among the developed countries, particularly the United States and Europe, have been dominated by portfolio capital. Direct investment has played the largest role in net outflows from Japan and especially in the inflows to Southeast Asia, China, and Latin America. The different forms of international investment flows not only vary in impor- tance among regions but have different characteristics in other ways. Direct investment flows have been the least volatile among the different types in most countries, the chief exception being the United States, which has flipped back and forth from being the dominant net supplier to dominant net recipient and back to dominant net supplier. For other countries, and particularly for devel- oping countries, direct investment has been the most dependable source of for- eign investment. One reason for the relative stability of direct investment flows may be the importance within them of retained earnings. These do fluctuate, of course, with profits, but they rarely shift sharply into the negative once firms are well established. Retained earnings appear to be most important in outward U.S. and U.K. investment. There are some large negative retained earnings in recent years for foreign direct investment in the United States, relatively new and perhaps purchased at the peak of real estate markets, but the general relation- ship seems to be that older holdings of direct investment grow a good deal from retained earnings.

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  Report on the Measurement of International Capital Flows

  • International Monetary Fund(Author)
  • 1992(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  III. Direct Investment Introduction Definition Reinvestment of Earnings Description and Global Imbalances Country Practices and Adjustments Bilateral Comparisons Concluding Remarks Other Direct Investment Capital Flows Description and Global Imbalances Country Practices and Adjustments Bilateral Comparisons Concluding Remarks Data Sources and Methods Conclusions and Recommendations IV. Portfolio Investment Introduction Definition Country Practices and Adjustments Bonds Equities Bilateral Comparisons Coverage of Portfolio Transactions Private Individuals Financial Intermediaries Other Financial Institutions Concluding Remarks Stock of Cross-Border Bonds Conclusions and Recommendations V. Other Capital: Overview and Short-Term Marketable Instruments Overview of “Other Capital” in Balance of Payments Short-Term Marketable Instruments Reported Data on Short-Term Instruments Forms of Short-Term Marketable Instruments Euronotes Foreign Commercial Paper in the U.S. Market Eurodollar Certificates of Deposit Treasury Bills Conclusions and Recommendations VI. Other Capital: Nonbank Capital Flows Measured from International Banking Statistics Introduction International Banking Statistics Nonbank Transactions with Foreign Banks Nonbank Claims on Foreign Banks Nonbank Liabilities to Foreign Banks Summary Comparisons Conclusions and Recommendations VII. External Debt in Balance of Payments Data and IBRD Debt Statistics Introduction International Debt Statistics Long-Term Debt Short-Term Debt Conclusions and Recommendations VIII. Transactions in Official Reserve Assets Introduction Instrument Composition of Reserve Transactions Special Questionnaire Responses Swap Transactions in the European Monetary System Instrument Allocation of Foreign Exchange Transactions Adjustments to the Reserves/LCFAR Discrepancy Conclusions and Recommendations IX. Offshore Financial Centers

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  The Science of Economic Development and Growth: The Theory of Factor Proportions

  The Theory of Factor Proportions

  • C.C. Onyemelukwe(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  Today, the factors that are regarded as transferable are capital, labor, and technology. Of these, technology has not always been regarded as a mobile factor. The importance of technology and its mobility seem to have increased with the emergence of new growth theory. Land is said to be an immobile factor. Recall that the conventional literature does not recognize material as a factor because of traditional economic ambivalence about the role of material. Instead, material is often classed in a characteristically unscientific language as a kind of working capital. Yet material is historically the oldest of the mobile factors.

  Conventional economics takes the position that a country’s factor endowments do not provide it with the best combination to maximize welfare. So, it is thought, each country needs to export and import products or factors. This is in direct contrast to the science of economic development and growth, which says that to achieve maximum growth each country should harness all its factors using factor proportions deriving from its factor endowments.

  Trade economists assert that factor mobility between countries will increasingly reduce their comparative advantage differences such that they could end up with similar factor “endowments.” The countries are then said to have minor comparative cost differences and will engage mainly in intraindustry trade. Any cost differences are said to be due to technological differences. In that case, it is asserted that trade and factor mobility become complementary.

  Capital Inflow

  The focus here is the effect of capital inflow on economic development and growth. By capital inflow, we mean any activity that increases the capital stock of a recipient country. A scientific analysis of capital does not involve finance because in science capital comprises only material and labor. Apart from external capital inflow, we can also treat capital inflow as capital in a country in a deliberate policy to increase its capital accumulation. Our interest is in capital as a production aid.

  Foreign investment is often associated with import of capital equipment into a recipient economy. Foreign investment is usually undertaken by multinational corporations (MNCs) and can be directed toward either an advanced economy or an underdeveloped country. MNCs tend to obtain the capital equipment they need from advanced economies. It is, however, also possible to produce simpler types of capital equipment in developing countries. The NICs of East Asia initiated the recent trend of underdeveloped countries engaging in foreign investment in advanced countries.

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  World Economic Outlook, April 2011 : Tensions from the Two-Speed Recovery: Unemployment, Commodities, and Capital Flows

  • International Monetary Fund. Research Dept.(Author)
  • 2011(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  CHAPTER 4 International Capital Flows: RELIABLE OR FICKLE?

  Passage contains an image

  What Are the Main Findings?

  • The postcrisis recovery in net capital flows was more impressive in terms of its pace than its level Nevertheless, for many EMEs that were not at the center of the global crisis, levels were comparable with those during previous episodes of large net flows. The composition of the upturn was somewhat different, however, with a higher share of debt-creating flows and a lower share of foreig direct investment (FDI) compared with historical trends.
  • Net flows have become slightly more volatile for all economies over time. They also exhibit low persistence. The volatility of net flows is generally higher in EMEs and other developing economies (ODEs) than in AEs. By contrast, there are no obvious differences in the persistence of net flows across economies. Bank and other private flows have typically been the most volatile, and portfolio debt the least persistent, but the differences in volatility and persistence across types of flow are not always statistically significant for all economies. FDI is only slightly more stable and more persistent than debt-creating flows to EMEs.
  • Historically, net flows to EMEs have tended to be higher under low global interest rates, low global risk aversion, and stronger growth performance in EMEs compared with AEs. The pattern is most pro nounced when global interest rates and risk aversion are both low. Nevertheless, common factors—both global and regional—account for a relatively small share of the total variation in net flows to EMEs, highlighting the importance of domestic factors.
  • Advanced and emerging market economies that are directly financially exposed to the United States face an additional decline in their net capital flows in response to U.S. monetary policy tightening over and above what is experienced by economies with no such U.S. direct financial exposure. The negative additional effect of a hike in the U.S. rate that is unanticipated is larger than that of a realized rate increase. Thus, positive U.S. monetary policy surprises may induce investors to revise up their expectations for future U.S. monetary policy, thereby resulting in a sharper retrenchment of their positions in economies that are directly financially exposed to the United States than under actual U.S. monetary policy changes that were partly or wholly anticipated. This negative additional effect for financially exposed EMEs is larger for EMEs that are more integrated with global financial markets and those with relatively flexible exchange rate regimes, but smaller for EMEs with greater domestic financial depth and strong growth performance. Finally, of particular relevance to today’s environment is the finding that the negative additional effect on net flows to financially exposed EMEs due to U.S. monetary policy tightening is larger during periods of low global interest rates and low global risk aversion. This may reflect the fact that cross-border investors are more likely to chase returns when global financial asset returns are low and risk appetite is high.

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