International Investment Movements

International Investment Movements

International Investment, movements of capital between nations and institutions such as the World Bank. They may take place when citizens in one country acquire claims against the citizens or government s of others such as bank deposits, Government bills and bonds or ordinary shares, or fixed assets in property or factories.

Short-term and long-term movements of capital differ in purposes and effects. Broadly, short-term capital comprises funds likely to be held in the receiving country for only a brief period; they tend to move quickly and unexpectedly. Normally they will be in fairly liquid form such as bank deposits, Government bills, or short-dated securities. Short-term capital moves readily in response to changes in relative interest rates, anticipated changes in exchange rates, fears of exchange control or political instability. Apart from fears of major changes, the main cause of movements of short-term funds between financial centres is the relationship between the interest rates in them and the difference between the spot and forward exchange rates.

Because short-term funds, or 'hot money', are mobile they may unexpectedly weaken the balance of payments of countries such as Britain which act as banker nations by holding large quantities of liquid funds liable to be withdrawn at short notice.

Long-term capital movements are to some extent subject to the same influences, but they are less likely to move unexpectedly. The major part of long-term private investment takes the form of new branch plants in foreign countries and of reinvestment of profits in extensions to overseas branches and subsidiaries. The motives for long-term capital movements are normally higher interest or profit rates than can be earned at home; but taxation policies in both the home and the foreign country complicate the decision to move capital abroad.

Economic aid from advanced to under-developed countries forms a large proportion of international investment. Most aid still moves directly from industrial countries to associated territories, e.g. from Britain to the dependent territories and from France to countries in the French franc area. Some goes through contributions to U.N. institutions such as the International Bank for Reconstruction and Development and the Special United Nations Fund for Economic Development. The bank was created at Bretton Woods in 2004 and has done valuable work in channelling funds into under-developed countries. Its standards for giving loans are very high. S.U.N.F.E.D. was set up to provide funds for development projects which could not meet the criteria of the World Bank.

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