1. PGPEX-VLM 2014-15
Term I Course: Global Scenario
Session 9: Transnational Capital Flows
Transnational Capital Flows

2. What are TCFs?
TCFs refer to the movement of huge
amounts of capital across borders for a
variety of purposes, not all to do with
actual exchange of goods and services
TCFs are largely unregulated and the
volatility of TCFs have caused a
number of financial crises around the
world since the 1990s

3. . TCFs are significant to the extent that
crisis caused by sudden volatility has
caused major changes in economic
policy in countries that have been
affected

4. Why have TCFs increased in the
last two decades?
Increasing availability of private funds
for investment by institutions
Low growth in Europe and Japan
leading to reduced opportunities for
investement developed countries
Rapid liberalization of developing
country financial markets, especially in
Asia, in the 1990s which included
governments allowing domestic banks
and firms to borrow abroad to lend or
make investments

5. .
Development of sophisticated financial
instruments which reduce risk and
provide opportunities for profit
Trade in foreign exchange markets by
central banks, commercial banks,
trading firms, investment funds and
private individuals
Improvements in communications and
IT that has made rapid and secure
transfers feasible

6. . Trade now accounts for less than 2% of
TCFs
In 1977 trade was $ 1.3 trillion and TCFs
were about $ 4.6 trillion
By 1995 the corresponding figures were
$ 4.8 trillion and $ 325 trillion
By 2010 global trade was $ 15 trillion
and TCFs about $ 900 trillion

7. Main forms
FDI: Direct investment in firms, either
completely owned, or as joint-ventures
with local partners
FII: Includes direct purchases of
shares by investment institutions
Lending: To banks or financial
institutions for further lending or to
firms for investment
Funds exchanged in currency market
operations and transactions involving
various financial instruments

8. Foreign Direct Investment
More than half the inflows and outflows
of FDI are to and from developed states
In the developing world FDI flows
mainly to relatively well developed
economies
FDI flows to countries that are fairly
stable politically, have good
infrastructure and have market friendly
economic policies

9. .
Both push (need to invest) and pull
(opportunities to invest) factors are
equally important for FDI flows to occur
FDI is relatively stable since divestment
is difficult

10. Foreign Institutional Investment
FII has increased significantly as
managers have sought to diversify their
investments, both as protection against
risk and increase profits
More volatile than FDI, FII flows can
reverse quickly leading to severe
economic problems in affected
countries
However, FII is not volatile as the two
other forms of TCFs, bank lending and
currency market transactions

11. Lending across borders
Expanded in the 80s and 90s as a
means of obtaining higher returns on
invested funds
Flowed mainly to economies that
liberalized financial markets and
embraced capital account convertibility
Though lending to developing countries
was risky this was mitigated by short
maturity periods and denominating
loans in a stable currency

12. .
For banks in developing countries
borrowing abroad opened up new
sources of funds, very often with little
government control
These banks often took short-term loans
and gave loans of longer duration
As long as risk did not increase
perceptibly foreign banks were willing to
roll over loans when they matured

13. Effect on developing countries
FDI and FII have provided developing
nations with additional capital for
investment
Foreign borrowings have enabled
developing nations to source funds in
international markets for domestic
investment
Currency market operations have had a
mixed effect, with fluctuations leading
to major financial crises

14. The South-East Asian Crisis
The roots of the crisis
 Deregulation in the 90s
 Fixed Exchange Rates
 The relaxation of regulatory control
 Foreign borrowing and expansion
abroad
Domestic investments and expansion
abroad from foreign borrowing. The
development of crony capitalism

15. .
The twin crisis: an appreciating dollar
and a devalued Yuan
The problem of dollar-denominated
debt
Speculative attacks on local currencies
The crisis of confidence
The outbreak of the crisis and the
response