INTERNATIONAL CAPITAL MOVEMENTS
International Economics or international business has two parts – International trade and International Capital. International capital (or international finance) studies the flow of capital across international financial markets, and the effects of these movements on exchange rates. International capital plays a crucial role in an open economy. In this era of liberalisation and globalisation, the flows of international capital (including intellectual capital) are enormous and diverse across countries. Finance and technology (e.g. internet) have gained more mobility as factors of production especially through the multinational corporations (MNCs). Foreign investments are increasingly significant even for the emerging economies like India. This is in-keeping with the trend of international economic integration. A Peter Drucker rightly says, “Increasingly world investment rather than world trade will be driving the international economy”. Therefore, a study of international capital movements is much rewarding both theoretically and practically.
Meaning of International Capital
International capital flows are the financial side of international trade. Gross international capital flows = international credit flows + international debit flows. It is the acquisition or sale of assets, financial or real, across international borders measured in the financial account of the balance of payments.
Types of International Capital
International capital flows have through direct and indirect channels. The main types of international capital are: (1) Foreign Direct Investment (2) Foreign Portfolio Investment (3) Official Flows, and (4) Commercial Loans. These are explained below.
Foreign Direct Investment
Foreign direct investment (FDI) refers to investment made by foreigner(s) in another country where the investor retains control over the investment, i.e. the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment. Thus, FDI may take the form of a subsidiary or purchase of stocks of a foreign company or starting a joint venture abroad. The main feature of FDI is that ‘investment’ and ‘management’ go together. An investor’s earnings on FDI take the form of profits such as dividends, retained earnings, management fees and royalty payments.
According to the United Nations Conference on Trade and Development (UNCTAD), the global expansion of FDI is currently being driven by over 64,000 transnational corporations with more than 800,000 foreign affiliates, generating 53 million jobs.
Various factors determine FDI – rate of return on foreign capital, risk, market size, economies of scale, product cycle, degree of competition, exchange rate mechanism/controls (e.g. restrictions on repatriations), tax and investment policies, trade polices and barriers (if any) and so on.
The advantages of FDI are as follows.
1. It supplements the meagre domestic capital available for investment and helps set up productive enterprises.
2. It creates employment opportunities in diverse industries.
3. It boosts domestic production as it generally comes in a package – money, technology etc.
4. It increases world output.
5. It ensures rapid industrialisation and modernisation especially through R&D.
6. It paves the …