Global capital flows to developing countries increased significantly during the nineties. In view of the East Asian financial crisis and Latin American experience, which type of inflow is good for the host country?

Question

YESPYQ · Accepted Answer

Correct answer: Foreign Direct Investment. The East Asian Financial Crisis (1997) demonstrated the risks of excessive reliance on short-term portfolio invest- ments, which led to currency instability and market crashes. FDI, on the other hand, is less volatile and contributes to sustainable growth. Option (b) is correct : Among the various forms of capital in- flows, Foreign Direct Investment (FDI) is considered the most stable and beneficial for a host country’s economy. Unlike For- eign Portfolio Investment (FPI) and External Commercial Borrowings (ECB), which can lead to financial volatility, FDI brings in :  Long-term capital investments in infrastructure, manufacturing, and services.  Technology transfer and skill enhancement.  Employment generation and economic stab-ility. 318

Global capital flows to developing countries increased significantly during the nineties. In view of the East Asian financial crisis and Latin American experience, which type of inflow is good for the host country?

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