What are the Factors which affects the International Capital Movements?

The following factors affect international capital movement:

1. The Rate Of Interest:

As Ohlin puts, the differences in the rate of interest between countries serve as the most important stimulus to export and import of capital. Capital will flow from low-return yielding country to the high-income yielding country, because a country which has a low rate of interest apparently finds it profitable to export capital to the country in which the interest rates are high.

2. Speculation:

Speculation may also determine the short-term capital flow between countries. Speculation may pertain to either expected change in the interest rate or anticipation of change in the rate of exchange.

When people expect rate of interest to rise at home in the future, they would like to take advantage of the consequent lower bond price then, but presently they will invest abroad in short- term securities.

Thus, when a country expects a rise in interest rate in future it will experience an outflow of capital for the present. Contrarily, when a country anticipates a fall in the rate of interest in future, it pays foreigners to buy bonds and securities at their current low price and sell them later on at a high price. Eventually, it will experience an inflow of capital.

Similarly, if a devaluation of a country’s currency {i.e., fall in its exchange rate) is expected, residents of the country will tend to hold foreign balances by converting their currency into foreign assets – bonds and securities; in the same manner, non-residents of the country also may withdraw their investments in the short-term securities of their country by selling them and taking back their capital.

As such, an anticipated devaluation leads to capital flight abroad. Similarly, if revaluation, i.e., a rise in the exchange rate of a country’s currency, is expected the inflow of capital will get momentum.

3. Bank Rate:

Since bank rate has a link with market rates of interest, the central bank can use the bank rate as means of including short-term capital flows. The raising of bank rate, thus, may stimulate an inflow of capital or prevent the flight of capital abroad.

4. Marginal Efficiency of Capital:

For investing abroad entrepreneurs may compare the marginal efficiency of capital against the rate of interest between different countries and in different areas of investment. Thus, the country which has a marginal efficiency of capital will attract an inflow of capital. Likewise, a particular
field of long-term investment will be chosen where the expected rate of returns is higher than that of alternative investments abroad.

5. Political Climate :

Apart from good prospects for foreign capital, if a country has political stability and internal and external peace, so that, economic and social progress is maintained, it will experience a better inflow of long-term direct investment than otherwise.

6. Government’s Policy:

If the government is bent upon nationalisation and expansion of public sector and adopts a hostile attitude towards foreign capital, private foreign capital will not move into such a country. On the other hand, if government adopts an encouraging policy in respect of foreign capital, it may induce inflow of foreign capital.

7. Economic Climate:

Overall healthy economic position of the country, such as development of infrastructure of the economy, growth of financial institutions, availability of trained and skilled labour and other production facilities will play a significant role in attracting inflow of capital from abroad. Similarly, certain unexploited fields of exporting industries like plantations, mine,s, etc., also provide a good attraction to foreign investors.

8. Tariff Policy:

A high protective duty may prevent foreigners’ export to such country, so it will be profitable for the foreigner to start production in the protected country to compete with domestic producers. A direct foreign investment is thereby attracted.

9. Exchange Control Policy:

A country resorting to severe exchange control will put automatic restriction on the outflow of capital abroad.

10. Business Condition:

Capital will tend to flow from a country experiencing depression into a country which is in prosperity.