Capital Flows relate to the general movements of money and investments so that they can be invested in securities, business, or trade production. This also takes into consideration flows of such capital that occur naturally within a multinational corporation. This might result from capital spending in other divisions, investment capital allocation, acquisitions of rival companies, or R&D research and development spending.
Governments can also engage in capital flow direction by steering money they collect in tax levies into particular policies and programs as well as with their trade policies and financial policies on currency management and bilateral trade with other countries. Even individual investors can be involved in capital flow through their saving and investing personal capital into mutual funds, bonds, and stocks as well as other types of financial securities.
The United States corporate, not for profit, and government organizations direct capital flows as a result of legislation, regulation, and analysis. Economists within the U.S. and other developed nations like to study these various categories of capital inflows and outflows. This includes specific types like mutual fund flows, venture capital, asset class balancing and reallocation, federal budgets, and capital spending budgets of corporations.
In fact there are many different categories of capital flow. Within the movements in asset classes, these can be sufficiently measured as they move back and forth between stocks, cash, bonds, mutual funds, and other forms of financial securities. Venture capital can measure the shifts of investments moving around startup businesses and industries. Mutual funds will actively track the net withdrawals and additional cash deposits from and to a wide range of fund classes. With capital spending budgets, these can be studied on a companywide level. This way firms can monitor their various growth plans. Governments utilize their capital flow studies to match their budgets appropriately up with government spending plans.
Another insight that such capital flow studies provide pertains to the capital markets. They can prove the weaknesses or strengths of the various markets as economists examine the direction and pace of capital inflows and outflows. This is particularly useful for investors who can know the growth rates in specific capital flows which provide them with ideas of trends and possible opportunities. Capital spending flows will help them to know which industries and specific corporations are on the move and might be good investment opportunities. Venture capital flows reveal risks involved with venture financing of different startup industries and even specific startup operations.
Real Estate is another investment arena where capital flow direction can be most illuminating for investors. For example, during the devastating global financial crisis of 2007-2009, the capital inflows to Real Estate markets drastically slowed down. Sales did not again reach the pre-crash levels until the year 2013. By 2015, such capital flows grew as much as 45 percent compared to the levels in 2014 with regards to commercial property investment inflows.
The study of capital flows can also reveal big pictures for emerging market economies as well. As these more volatile economies often undergo rapid growth spurts and sharp contractions, the capital flow can correspondingly rise and fall steeply. Higher capital inflows often create credit booms. This leads to hot money asset price inflation. Sometimes it is offset by currency depreciation losses as exchange rates shift or equities’ prices drop.
India is a classic example to consider among the developing nations of the world. The huge nation has experienced significant fluctuation periods which started back in the decade of the 1990s. Capital inflows occurred throughout the 1990s to the first years of the 2000s. This coincided with steady and positive growth. From the first years of the 2000s through 2007, capital inflows shifted into overdrive. The rapidly accompanying growth stalled out suddenly because of the peak of the global financial crisis in 2008/2009. Capital outflows became highly volatile during these several years.