Global capital-flows to developing countries increased significantly during the nineties. In view of the East Asian financial crisis and Latin American experience, which type of inflow is good for the host country?

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Q: 70 (IAS/2002)
Global capital-flows to developing countries increased significantly during the nineties. In view of the East Asian financial crisis and Latin American experience, which type of inflow is good for the host country?

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,289,77,12,289,56,9

keywords: 

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Foreign Direct Investment (FDI) is generally considered as a type of inflow that is beneficial for the host country, especially in light of the experiences of the East Asian financial crisis and the Latin American region.

Foreign Direct Investment involves long-term investments made by foreign entities in the productive assets of a host country. These investments are often aimed at establishing new businesses or expanding existing ones, leading to increased production, job creation, and technology transfer. FDI brings not only financial capital but also expertise, managerial skills, and access to international markets.

Compared to other types of capital inflows like commercial loans, foreign portfolio investment, or external commercial borrowings, FDI has several advantages:

1. Stable and long-term: FDI represents a long-term commitment by foreign investors, providing stability and confidence to the host country`s economy.

2. Productive capacity building: FDI contributes to the development of physical infrastructure, technology, and human capital, leading to increased productivity and competitiveness of domestic industries.

3. Job creation: FDI creates employment opportunities, reducing unemployment and contributing to poverty reduction.

4. Technology transfer: FDI often involves the transfer of advanced technologies, skills, and knowledge to the host country, enhancing its capacity for innovation and economic growth.

5. Sustainable development: FDI can support sustainable development by promoting environmentally friendly practices and responsible corporate behavior.

In contrast, other types of capital inflows like commercial loans, foreign portfolio investment (investment in stocks and bonds), or external commercial borrowings (borrowings from international markets) can be more volatile and speculative in nature. These forms of capital inflows may increase a country`s vulnerability to financial crises and may not contribute as significantly to long-term development and economic growth.

Therefore, considering the experiences of the East Asian financial crisis and the Latin American region, Foreign Direct Investment (FDI) is generally considered the type of inflow that is more beneficial for the host country.