Capital flows (Theme 3)

3.1.5, 3.4.1

define capital flows

the flow of investment money from one country to another

what type of capital flows are there?

FDI - An ownership take in a foreign company/expenditure on assts abroad

Portfolio investment - buying shares in a foreign company

Company debt - lending to a foreign company

Government bonds - lending to another Government

Development grants

What are some facts about China’s BRI? - Belt and Road Initiative

$1.3 trillion over 10 years on 5,300 projects in South-East Asia, Kenya and others

Improving infrastructure. Incomes and employment in some areas increased

But high risk - moral hazard for banks

loans have had to be extended

Externalities of environmental impacts

What are some advantages of the free movement of capital?

Can add to AS

Maybe add to AD - multiplier effect is possible

what are some disadvantages of the free movement of capital?

flows are unpredictable

profit can flow out

debt capital must be repaid

money may not be spent on worthwhile schemes

MNCs are problematic

how can foreign investment be attracted?

Stable environment - currency, politics, prices

Low capital - output ratio - so large return on investment

this means that developed economies attract a lot

what are the key evaluative points?

Depends on the investment - Externalities?

are mncs regulated

state of the world economy and the volatility of the flows

Overall in the absence of domestic savings and investment, capital flows are a major solution to the problem of lack of growth