Abstract
Many emerging economies in Asia and elsewhere have been faced with sharply volatile capital flows, mainly driven by sharp booms and busts in foreign portfolio and short-term bank flows, together referred to as “mobile capital”. In contrast, FDI flows have remained remarkably stable (see Chapter 20). The policy focus on this “mobile capital” has tried to limit such flows via capital account restrictions or through prudential measures, or by ensuring that the central bank holds enough low-yielding liquid assets (i.e. foreign exchange reserves) to cover possible sudden withdrawals.
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21 Foreign Portfolio versus Foreign Direct Investment Flows: Are They So Different?
2. Thus, FDI and FPI may be negatively correlated if there is a fire-sale of assets during a crisis and foreign investors who have bought controlling equity stakes then turn around and sell part of their stake following asset price revaluations once the crisis abates. See V. Acharya, H. S. Shin and T. Yorulmazer (2008). Fire-Sale FDI, mimeo, Princeton University and G. Bird and R. S. Rajan (2002). “Financial Crises and the Composition of International Capital Flows: Does FDI Guarantee Stability?”, Development Policy Review, 20, pp.191–202.
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© 2011 Ramkishen S. Rajan
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Rajan, R.S. (2011). Foreign Portfolio versus Foreign Direct Investment Flows: Are They So Different?. In: Emerging Asia. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, London. https://doi.org/10.1057/9780230306271_21
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DOI: https://doi.org/10.1057/9780230306271_21
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