Capital Movement Factors

The following factors affect international capital movement:

1. The rate of interest

As Ohlin puts, the difference in the rate of interest between countries serve as the most important stimulus to export and import of capital. Capital will flow from low – return yielding country to the high – income yielding country, because a country which has a low rate of interest rates is high.

2. Speculation

Speculation may also determine the short-term capital flow between countries. Speculation may pertain to either expected change in the interest rate or anticipation of change in the rate of exchange. When people expect rate fo interest to rise at home in the future they would like to take advantage of the consequent lower bond price then, but presently they will invest abroad in short-term securities.

3. Bank rate

Since bank rate has a link with market rates of interest, the central bank can use the bank rate as means of including short- term capital flows. The raising of bank rate thus may stimulate an inflow of capital or prevent the flight of capital abroad

4. Marginal efficiency of capital

For inviting abroad entrepreneurs may compare the marginal efficiency of capital against the rate of interest between different countries and in different areas of investment. Thus the country which has a marginal efficiency of capital will attract an inflow of capital. Likewise a particular field of long term investment will be chosen where the expected rate of returns is higher than that of alternative investments abroad.

5. Political climate

Apart from goods prospects for foreign capital, if a country has political stability and internal and external peace, so that economic and social progress is maintained, it will experience a better inflow of long-term direct investment than otherwise.

6. Government policy

If the government is bent upon nationalization and expansion of public sector and adopts a hostile attitude towards foreign capital private foreign capital will not move into such a country. On the other hand if government adopts an encouraging policy in respect of foreign capital it may induce inflow of foreign capital.

7. Economic climate

Overall healthy economic position of the country such as development of infrastructure of the economy growth of finical institutions availability fo trained and skilled labour and other production facilities will play a significant role in attracting inflow of capital from abroad similarly cretin unexploited filed of exporting industries like lactations mines etc. also provide a good attraction to foreign investors.

8. Tariff policy

A high protective duty may prevent foreigners export to such country so it will be profitable for the foreigner to start producing in the protected country to compete with domestic producers a direct foreign investment is thereby attracted.

9. Exchange control policy

A country resorting to severs exchange control will put automatic restriction on the outflow of capital abroad.

10. Business conditions

Capital will tend to flow from a country experiencing depression into a country which is in prosperity.

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