Question

Describe the typologies of private capital flows and the rationale for the existence of a ‘hierarchy’ of private capital flows to developing countries

Answer 1

Two types of private capital flows to other countries are foreign direct investment and foreign portfolio investment.

foreign direct investment is related to investment into economy of the other country and it is related to investment into sectors of the other countries market which have a potential to grow according to the private investor.

foreign portfolio management is associated with management of the portfolio in the other countries which is directed towards management of investment of foreign nationals into another country's is asset.

There is a hierarchy of private capital flow to developing countries as these investment making corporations and private individuals believe that the emerging markets are highly efficient when it comes to multiplication of returns because they are highly underpenetrated economies and they have not been utilised fully so there is a potential of generation of excessive returns in those economies