Capital Movements

International exchange transactions are not only confined to commodities, but include international movement of capital funds as well. International capital movements, however, should not be identified with the payments for imports. Capital flows internationally as a factor of production for the sake of suitable investment and as aids to the less developed countries. Indeed, international investment has played a significant role in the economic upliftment of many countries in the last few decades.

(i) Home and foreign capital

On the balance of payments of a country an explicit distinction is made between home capital and foreign capital. Home capital refers to investments made abroad by the residents of the country concerned, while foreign capital refers to the investments made by foreigners in this country. Thus, the former implies outflow of capital and the latter implies inflow of capital funds in the balance of payments account of the country under consideration. Apparently, the net investment position of the country can be known by the algebraic different between the debits and credits of both types of capital investments.

(ii) Government and private capital

When in investing capital abroad, the investor (whether government or private body) keenly participates in orgnisational matters, it is referred to as direct investment.

(iii) Foreign aids 

Foreign aids refer to transfer payments which are unilateral gifts for aid. The receiving country has no obligation whatsoever to repay the grants made by the donor country. Usually, developed countries give such aids to developing countries for their development planning. The aid may sometimes be given for military purposes also. Generally, aids are given for a specific use and it must be fulfilled by the recipient country.

(iv) Short–term and long-term capital

A short- term capital is embodied in a credit instrument which is redeemable within a year. For example, chequable bank deposits in a bank abroad are a short- term capital. Similarly, foreign bonds which mature within a year also constitute short- term capital. Short- term capital movements are usually speculative in nature.

Foreign investment: Foreign investment has two dimensions:

Port Folio Investment: it refers to short term and long term investment devoid of any managerial control. It refers to pure financial investment.

Foreign Direct Investment (FDI): It refers to long term real business investment of a firm abroad. It involves transfer of capital with the extension of a business enterprise from its home country into a foreign host country. The flow of FDI is least determined by the interest rate differentials.

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