capital inflow

capital inflow

a movement of funds into a particular country, the HOST COUNTRY, from one or more foreign countries, the source countries. The host country may attract capital inflows for a variety of reasons, including:
  1. FOREIGN DIRECT INVESTMENT by MULTINATIONAL ENTERPRISES in physical assets such as the establishment of a local manufacturing plant or the acquisition of a local firm;
  2. Portfolio investment in financial securities (equities and bonds etc. issued in the host country by overseas residents and financial institutions, pension funds, insurance companies etc.);
  3. Host government borrowing from international banks or from other governments to finance a BALANCE OF PAYMENTS deficit, borrowing by individuals and companies from international banks and inter-company transfers to finance current consumption and investment;
  4. Short-term deposits with money market and banking institutions in the host country relating to interest rate differentials between countries and/or speculation in the hope that a country's EXCHANGE RATE may appreciate, thereby producing a CAPITAL GAIN.

By contrast, a CAPITAL OUTFLOW is the out-ward movement of funds from one country to other countries for the kinds of reasons listed above. See FOREIGN INVESTMENT.

capital inflow

a movement of funds into the domestic economy from abroad, representing either the purchase of domestic FINANCIAL SECURITIES and physical ASSETS by foreigners, or the borrowing (see BORROWER) of foreign funds by domestic residents.

Capital inflows involve the receipt of money by one country, the host, from one or more foreign countries, the source countries. There are many reasons for the transfer of funds between nations:

  1. FOREIGN DIRECT INVESTMENT by MULTINATIONAL COMPANIES in physical assets such as the establishment of local manufacturing plant;
  2. the purchase of financial securities in the host country which are considered to be attractive PORTFOLIO investments;
  3. host-government borrowing from other governments or international banks to alleviate short-term BALANCE OF PAYMENTS deficits;
  4. SPECULATION about the future EXCHANGE RATE of the host country currency and interest rates, expectation of an appreciation of the currency leading to a capital inflow as speculators hope to make a capital gain after the APPRECIATION of the currency

By contrast, a CAPITAL OUTFLOW is the payment of money from one country to another for the sort of reasons already outlined. See also FOREIGN INVESTMENT, HOT MONEY.

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