I International Capital Flows

Intro: International Capital Flows
International capital flows are the financial side of international trade. When someone imports a good or a service, the buyer (the importer) gives the seller (the exporter) a monetary payment. Basically, ICF are the transfer of assets across international borders and represent a major source of financing economic activity in developing countries. International capital flows have the potential to bring a wide range of benefits to both the host nation and the country of origin, increasing global output, employment, and wealth.
Three groups of investments are the components of ICF: (p143) Portfolio Investments (45%), Bank and other investment (30%) and FDI (25%). Each category has strong benefits and risks for the country concerned.

A. Portfolio Investment
Portfolio investment is the category of international investment that covers investment in equity and debt securities. It is a collection of investments all owned by the same individual or organization. These investments often include stocks, which are investments in individual businesses; bonds, which are investments in debt that are designed to earn interest; and mutual funds, which are essentially pools of money from many investors. It does not create a lasting interest or effective management control over an enterprise.
By investing in foreign securities, investors can participate in the growth of other countries, hedge their consumption basket against ex-change rate risk, realize diversification effects and take advantage of market segmentation on a global scale. Even though these advantages might appear attractive, the risks for international portfolio investment must not be overlooked. In an international context, financial investments are not only subject to currency and political risk, but there are many institutional barriers. The most obvious way to invest internationally consists in the purchase of foreign securities directly,