I. Introduction
Countries with low levels of saving can turn to foreign capital in order to afford the capital expenditure necessary for investments. In a small open economy, building a large infrastructure project or constructing a modern factory will have a greater chance of completion if enough funding is available, and usually this can be obtained from foreign sources. This is called foreign direct investment—foreign capital that is invested in local projects, in which foreign residents own and control the activity. But foreign funds are invested not only in infrastructure projects or factory construction; most of the time, foreign capital is placed in short-term instruments like bonds, stocks and mutual funds. This is called foreign portfolio investment—foreign capital that is placed in money-market instruments and in stocks where the total shareholdings amount to less than 10 percent (BSP, 2007). The difference between foreign portfolio investment (in the Philippines, for example) and Filipino portfolio investment abroad is called the net portfolio investment.
Sources of foreign capital are varied, but they generally fall into the categories set below (Bates, 1999):
Capital Flows from the Major Industrialized Countries
(Billions of U.S. Dollars)
1975 1995
Portfolio Investment (Capital Markets) 12.4 330.0
Direct Investment (Multinational Companies) 34.7 215.0
Bank Loans (Commercial Banks) 46.2 55.0
Foreign Aid* (Governments/Multinational Institutions) 13.3 58.9
Source: Global Public Policy, Wolfgang H ...