Global capital investment trends and analysis

Global Capital Investment

There is some proof that capital through financial globalization may raise the growth rate in developing countries. "Traditionally, fixed exchange rates have been considered to require more reserves than flexible rates. Fluctuations in the balance of payments would be taken care of by compensatory exchange rate adjustments under a flexible regime, whereas they involve temporary swings in reserve holdings under a fixed regime. With flexible rates, fundamental disequilibria would be more promptly corrected, because the correct changes in price signals to exporters and importers would occur more quickly than under fixed rates held constant for too long." (Cline, 1976)

Developing countries that open up their capital markets may also accumulate very high levels of unsustainably debt so it is important that if the money comes they still control the citizens' consumption rates. "For example, there is evidence that international investors do engage in herding and momentum trading in emerging markets; more so than in developed countries. Recent research also suggests the presence of contagion in international financial markets. In addition, some developing countries that open their capital markets do appear to accumulate unsustainably high levels of external debt." (IMF, 2003)

A big factor if developing countries are to get capital from international markets is for them to have good and reliable human capital and a solid and honest government free of corruption and scandal. This usually goes a long way in attracting more foreign direct investment (FDI) which helps national growth. Nations that have a bunch of corruption will push foreign direct investment away. "Similarly, transparency of government operations, which is another dimension of good governance, has a strong positive effect on investment inflows from international mutual funds." (IMF, 2003)

Capital does find smaller and/or poorer nations but it often puts the pressure of overvalued exchange rates which may overextend the smaller of developing nations. Developing nations often get their money more from dealing with international investors that may destabilize the developing country's financial markets if they are allowed to. That means that developing nations should establish a strong foundation that is based more on the volatility of international capital flows, macroeconomic policies and a sound governmental base as opposed to allowing international investors to provide all of the capital.

Is there some critical distinction between "less developed" and "emerging"? (Please provide a definitive response in 1-2 paragraphs.)