What is the flow of finance capital?

Capital flows are transactions involving financial assets between international entities . Financial assets to be included can be bank deposits, loans, equity securities, debt securities, etc.

What are examples of capital market flows?

In a nutshell, capital flows refer to the movement of money and financial assets across national borders. This includes things like foreign direct investment (FDI), portfolio investment (buying and selling of stocks and bonds), and lending and borrowing between countries .

Why are capital flows significant for an economy?

Capital flows between countries can yield significant benefits. They allow investors to diversify their risks and increase returns, and they allow residents of recipient countries to finance rapid rates of investment and economic growth, as well as to increase consumption.

What is the theory of capital flow?

The flow theory explains that differences in interest rates can lead to international capital flows ; The portfolio theory further recognizes that besides interest, the ability of investors and the credit of capital-importing countries are also important factors that influence the transnational capital flows; The ...

What is the role of the capital market in the financial system?

Capital markets play a pivotal role in the formation of capital by enabling companies and other entities to raise funds for various purposes . Through mechanisms like IPOs and bond issuances, businesses can access the necessary capital to fuel expansion, research and development, and other strategic initiatives.

What are the three types of capital flows?

There are three major types of international capital flows: foreign direct investment (FDI), foreign portfolio investment (FPI), and debt .

What causes financial capital inflow?

In general, an increase in money demand is likely to attract short-term port- folio investment, whereas other changes, such as an increase in the domestic rate of return on capital, will tend to attract longer- term foreign direct investment.

What is an example of financial capital?

Economic or financial capital entails monetary funds and investments like equity, debt, or real estate . Human capital and social capital augment the purely economic rationale behind capital and together better explain how business and economic growth really work.

How does financial capital market work?

Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets . Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.

How do financial markets allocate capital?

Allocating Capital Financial markets attract funds from investors and channel them to enterprises that use that capital to finance their operations and achieve growth , from start-up phases to expansion - even much later in the firm's life.

Learn the Dynamics of Capital Flows to Reign the Financial Market (2024)

Definition of 'Capital Flows'

Capital flow is the movement of money for the purpose of investment, trade or business production. This occurs within corporations in the form of investment capital and capital spending on operations as well as research and development. On a larger scale, governments direct capital flows from tax receipts into programs and operations and through trade with other nations and currencies. Individual investors direct savings and investment capital into securities such as stocks, bonds and mutual funds.

Types and Magnitude of Capital Flows

FDI: Foreign Direct Investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment, which is a passive investment in the securities of another country such as stocks and bonds.

Types:

Horizontal FDI arises when a firm duplicates its home-country-based activities at the same value chain stage in a host country through FDI.
Platform FDI
Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains that is, when firms perform value-adding activities stage by stage in a vertical fashion in a host country.

Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally act as a stimulus for it.

Methods

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company anywhere
by acquiring shares in an associated enterprise
through a merger or an acquisition of an unrelated enterprise
participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:

low corporate tax and individual income tax rates
tax holidays
other types of tax concessions
preferential tariffs
special economic zones
EPZ – Export Processing Zones
Bonded Warehouses
Maquiladoras
Investment Financial Subsidies
Soft Loan or Loan Guarantees
Free Land or Land Subsidies
Relocation and Expatriation
Infrastructure Subsidies
R&D Support
Derogation from Regulations (usually for very large projects)

Importance and Barriers of FDI

The rapid growth of world population since 1950 has occurred mostly in developing countries. This growth has not been matched by similar increases in per-capita income and access to the basics of modern life, such as education, health care, sanitary water and waste disposal.

Foreign Direct Investment and the Developing World

A meta-analysis of the effects of foreign direct investment on local firms in developing and transition countries, conducted in the year 2011, suggests that foreign investment robustly increases local productivity growth. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.

Foreign Institutional Investor - FII

The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.

FDI vs FII

FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation.
2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily.
3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general.
4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor.

Portfolio Flows
In the early 1990s, India opened up to portfolio inflows through “Foreign Institutional Investors” (FIIs). This policy framework was largely in place by the year 2000. Equity investment by foreign institutional investors involves the following constraints:

The aggregate foreign holding in a company is subject to a limit that can be set by the shareholders of the company. This limit is, in turn, subject to “sectorial limits”, which apply in certain sectors only.
A single foreign portfolio investor can never own more than 10% of a company. Foreign ownership in certain sectors (telecom, insurance and banking) is capped at various levels.

Sovereign Debt (Government Debt)

Government debt (also known as public debt and national debt) is the debt owed by a central government. (In the U.S. and other federal states, "government debt" may also refer to the debt of a state or provincial government, municipal or local government). By contrast, the annual "government deficit" refers to the difference between government receipts and spending in a single year, that is, the increase of debt over a particular year.