1. What causes Capital Flight to happen?
Capital flight can be triggered by a country-specific event, or by a macroeconomic development that causes a large-scale shift in investor preferences. It can also be short-lived or carry on for decades.
Currency devaluation is often the trigger for large-scale – and legal – capital flight, as foreign investors flee from such nations before their assets lose too much value.
Capital flight can also be instigated by resident investors fearful of government policies that will bring down the economy. For example, they might begin investing in foreign markets, if a populist leader with well-worn rhetoric about protectionism is elected, or if the local currency is in danger of being devalued abruptly.
In a low-interest rate environment, “carry trades” – which involve borrowing in low-interest rate currencies and investing in potentially higher-return assets such as emerging market equities and junk bonds – can also trigger capital flight. This would occur if interest rates look like they may head higher, which causes speculators to engage in large-scale selling of emerging market and other speculative assets, as was seen in the late spring of 2013.
2. Do you think it is better for the government to have more FDI (Foreign Direct Investment) than FPI (Foreign Portfolio Investment)?
Yes, for the government is better to have Foreign Direct Investment compares to Foreign Portfolio Investment. Because FDI involves long-term investments in factories and enterprises in a country and can be exceedingly difficult to liquidate at short notice. On the other hand, FPI can be liquidated and the proceeds repatriated in a matter of minutes, leading to this capital source often being regarded as “hot money”.
Source:
- Material Session 2: Capital Flight
- What is CAPITAL FLIGHT? https://www.youtube.com/watch?v=azu4vfqr6qw
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