week four - capital mobility

Question 1

define financial globalisation

Answer 1

an aggregate concept that refers to rising global linkages through cross border financial flows

Question 2

define financial integration

Answer 2

an individual country’s linkages to international markets

Question 3

what does financial globalisation need

Answer 3

financial liberalisation (policies on financial liberalisation and capital account liberalisation)

Question 4

define capital inflows

Answer 4

amount of capital coming into a country

Question 5

define capital outflows

Answer 5

capital leaving a country

Question 6

define financial account

Answer 6

a measurement of increases or decreases in international ownership of assets (inflows - outflows)

inflows > outflows : indebted country
outflows > inflows : creditor country

Question 7

do creditor/indebted countries have negative or positive current accounts

Answer 7

creditor: positive
indebted: negative

Question 8

define a portfolio investment

Answer 8

a collection of financial investments like stocks, bonds, mutual funds, derivatives or bitcoins

Question 9

define a direct investment (FDI)

Answer 9

investments made by an individual or company in one country in a business located in another country

Question 10

define FDI according to OECD

Answer 10

investor owns at least 10% of voting power of the direct investment enterprise

Question 11

what does financial globalisation evolution depend on

Answer 11

1) governments: restricting/liberalising policies
2) lenders and borrowers: facilitate capital movements by borrowing or lending internationally
3) financial institution development: the most important factor, institutions can facilitate information technologies or an increase in competition (due to financial deregulation)

Question 12

what are the three main periods of financial globalisation

Answer 12

1) 1870-1913: gold standard
- free capital mobility
- fixed exchange rates
2) Bretton Woods
- fixed exchange rates
- capital controls
3) now
- free capital mobility
- capital controls
^depending on the country

Question 13

how can you measure financial integration

Answer 13

• index of financial integration
• financial openness

Question 14

what is the index of financial integration

Answer 14

measures the extent of government restrictions on capital flows across national borders (de iure)

Question 15

how can you measure financial openness

Answer 15

the volume of capital actually crossing the borders as a % of GDP, i.e. foreign assets and liabilities as a % of GDP (de facto)

Question 16

what indicates rapid financial integration

Answer 16

integration index and (financial assets + liabilities)/GDP

Question 17

is the level of financial integration lower or higher in developing companies

Answer 17

lower

Question 18

are bank loans and portfolio investments more or less volatile than direct investments

Answer 18

more

Question 19

evolution of capital flows 1980 onwards

Answer 19

• 1970s:excessliquidityfromoil-producingcountries(petrodollars)
• 1980s: deregulation of foreign exchange and stock markets liberalization and technological advances
• 1986: London began a process of transformation of its financial market (Big Bang) which allowed the entry of a multitude of international financial companies and the application of new technologies to speed up transactions
• Privatisation of state-owned companies: i.e. banks went global, with Spanish banks setting up in Latin America, absorbing many local banks and allowing the expansion of many multinationals that bought state-owned companies in sectors such as telephony, aviation, gas and electricity
• Increased role of institutional investors (mutual funds, pension funds, hedge funds, insurance companies)
• Morerecently:excessliquidityfromChina
• Shocks:2007/8financialcrises,pandemic

Question 20

what have theoretical models helped show that financial integration can help promote economic growth

Answer 20

(Prasad et al 2003)
- increases domestic savings
- reducing the cost of capital
- transfer of technological and managerial knowledge
- stimulation of domestic financial sector development

Question 21

financial globalisation benefits

Answer 21

• risk diversification
• efficient allocation of resources
• improvement in capital productivity
• financial sector development
• institutional changes
• better economic policies

Question 22

why is it difficult to detect a causal effect of financial integration on growth

Answer 22

there is weak empirical evidence because financial integration is not a necessary condition for achieving a high growth rate

Question 23

why does increased financial globalisation lead to an increase in the frequency of financial crises

Answer 23

• globalisation allows greater access to highly complex financial instruments that limit the ability of supervisors to monitor, assess and determine risks
• increasing the menu of investment opportunities and diversification reduces the incentive for lenders to obtain information from countries where they hold a small percentage of their financial portfolio

In emerging economies:
* Foreign banks are less aware of local risks and find it more difficult to access information than
local banks
* It is much more difficult for banks to get reliable information about their borrowers because information is much scarcer and more obscure
* Property rights are less clear, the judicial system to enforce them is weaker, and banking supervision is underdeveloped and with few means to enforce it

Question 24

what was the direction of capital flows in the first globalisation vs current globalisation

Answer 24

• first: europe (mainly UK) to other European countries or to new world countries
• current: strong growth of capital flows to east asian countries
• flows to more developed countries are more important
• recently: increase in capital flows from developing countries to other areas

Question 25

what does it mean if FDI is horizontal

Answer 25

firms set up abroad to capture other markets, exports from the parent firm’s home country is reduced, i.e. trade and FDI are substitutes

Question 26

what does it mean if FDI is vertical

Answer 26

there is a break in the value chain, different parts are carried out in different countries and trade increases, i.e. trade and FDI are complementary

Question 27

why have some developing countries attracted large amounts of FDI

Answer 27

• low wages
• technological advantages due to more investment in education
• no longer only labour intensive sectors being offshored

Question 28

which developing countries have attracted large amounts of FDI

Answer 28

ones with:
- high macroeconomic stability
- low inflation
- low government deficits
- low interest rates
- exchange rate stability
- low trade barriers

Question 29

what is a TCN

Answer 29

• transnational company
• an enterprise that undertakes FDI, produces outside its country of origin, international production etc.
• many companies around the world but without a centralised management system

Question 30

difference in multinational vs transnational companies

Answer 30

• multinational companies operate in more than one country and have a centralised management system

Question 31

why do companies invest abroad

Answer 31

1) location theory: raw materials, cheap labour
2) minimise costs: economies of scale
3) technology
4) avoid tariff barriers
5) government incentives
6) existence of clusters

Question 32

positive and negative impacts of TCN on growth

Answer 32

positive:
- increase in employment
- demand for inputs increase
- multiplier effect
negative:
- transfer of profits
- more competition for domestic companies
- monopolies
- environmental costs

Question 33

positive and negative effects of FDI

Answer 33

positive:
- comparative advantages
- positive externalities
- labour training
- technological benefits
negative:
- governments lose sovereignty
- tax evasion
- repatriation

Question 34

impact of FDI on the host country

Answer 34

depends on:
- conditions of country
- investment
- policies of the parent company