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?

Foreign Direct Investment (FDI) is the best type of inflow for host countries in the 1990s context because it proved relatively stable and resilient during major crises. Empirical studies note that FDI remained remarkably stable through the East Asian financial crisis and during Latin American episodes, while portfolio and short-term debt flows experienced large reversals [1]. A majority of capital inflows to Asia took the form of FDI, which tends to be longer-term and less prone to rapid withdrawal compared with portfolio or bank lending [2]. The Asian crisis highlighted that short-term, foreign-currency borrowing created dangerous maturity and currency mismatches—risks that FDI largely avoids .

Sources

1. [1] https://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htm
2. [2] https://www.nber.org/system/files/chapters/c6170/c6170.pdf