The EM Revolving Door of Capital
- August 6th, 2012
When people think of Emerging Markets, they think of countries where capital is flowing into for investment and development. But something interesting has been happening since the events of 2008-2009 - emerging countries have gotten a lot more proactive about making their own investments away from home.
Thus, the flows of capital between developed and developing markets have truly gained a sort of parity with the money coming in from OECD nations. It is important to think of EM nations as not just investments therefore, and to start thinking of them as investORS as well.
The below charts from the ST Louis Fed walk us through the, well, ins and outs, shall we say:
An engine of growth for emerging markets, capital flows are typically broken into two principal categories: foreign portfolio investment (FPI) and foreign direct investment (FDI). In spirit, FPI is investment that is made without gaining a controlling interest in the entity receiving the funds. It is an investment in an asset for the purpose of earning a return (e.g., the purchase of corporate or government securities or bonds). FDI entails some sort of ownership or controlling stake (e.g., investing in a factory or land). In general, the benchmark for FDI is if an investor takes at least a 10 percent controlling stake in the target entity. This essay focuses more attention on FDI because of its stronger links to growth and employment.
FDI cultivates development because, in addition to the resources that it provides developing economies, it gives them the opportunity to "learn by doing," which leads to growth-enhancing innovation and spillovers. Over the past couple of decades, the share of FDI in total foreign equity flows has been larger for developing countries than for developed countries. Arguably, the causality runs both ways: Those engaging in FDI are more likely to target countries with greater growth potential.
Figures 1 and 2 highlight the important trends in emerging markets' inflows and outflows of FDI. First, the absolute values of FDI into and out of emerging markets have shown a phenomenal increase since 2000. This is just another piece of evidence of the importance of emerging markets in an increasingly globalized world. Second, within emerging markets, the relative shares of individual countries' FDI flows have remained fairly stable. China appears to play a prime role in both the inflow and outflow of FDI. Brazil appears to be a major destination for FDI inflows, whereas Russia appears to be a major source of FDI outflows. Third, during 1993-1997, emerging markets accounted for over 20 percent of the share of global FDI inflows. The financial crisis in East Asia and the Russian Federation in 1998 saw a collapse in this share. This has been followed by a steady recovery since 2000. The share of FDI inflows into emerging markets now stands near the precrisis peak of the mid-1990s.
In other words, EM countries are more important than ever for two-way trade. Globalization is is not longer a parent-child funding mechanism.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.