7.4 Impact of capital flows on host and home countries
2 min read•july 24, 2024
International capital flows bring both opportunities and challenges to global economies. They can boost investment, transfer technology, and stimulate growth. However, they also pose risks like , , and .
For home countries, can lead to reduced domestic investment and . They may also cause pressures and . These impacts highlight the complex nature of global financial interconnectedness.
Benefits and Risks of International Capital Flows
Benefits of capital inflows
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Top images from around the web for Benefits of capital inflows
The Impact of Foreign Capital Inflow on Economic Growth in Developing Countries View original
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Investment in Ghana: An overview of FDI components and the impact on employment creation in the ... View original
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The Impact of Foreign Capital Inflow on Economic Growth in Developing Countries View original
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Investment in Ghana: An overview of FDI components and the impact on employment creation in the ... View original
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Increased investment through and expands domestic capital markets
provides access to advanced production techniques and improved management practices enhancing R&D capabilities
generates direct employment in foreign-owned enterprises and indirect employment through supply chain linkages fostering skill development
Asset bubbles lead to overvaluation in real estate markets (Manhattan, Tokyo) inflate stock markets misallocate resources
Financial instability increases vulnerability to external shocks (Asian Financial Crisis 1997) causes sudden stops or reversals of capital flows amplifies business cycles
result in overreliance on specific sectors (oil in Venezuela) crowd out domestic investment widen income inequality
Impact on Home Countries and Policy Implications
Impact of capital outflows
Reduced domestic investment decreases available capital for local projects lowers productivity growth potentially slows economic expansion
Brain drain results in loss of skilled workers (engineers, doctors) reduces innovation capacity negatively impacts long-term competitiveness
Balance of payments pressures create potentially depreciate currency necessitate external borrowing or reserve depletion
Tax base erosion reduces government revenues challenges funding for public services and infrastructure
Shift in economic structure leads to in some sectors (US manufacturing) changes comparative advantage
Political and social implications raise public concerns over job losses increase pressure for protectionist policies potentially cause social unrest due to economic changes