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Transcript of 67. dissertation attracting fpi flows the case study of vietnam
Dissertation
Attracting FPI flows: The case study of Vietnam
Table of Content Abstract 1
List of Tables 2
List of Figures 3
Table of Content .................................................................................................................................. 4
Chapter 1. Introduction .................................................................................................................. 7
1.1 Research motivation..................................................................................................... 7
1.2 Research structure ........................................................................................................ 8
Chapter 2. Literature Review......................................................................................................... 9
2.1 International capital flow ............................................................................................. 9
2.2 Impacts of FPI inflows on economy development .................................................... 11
2.2.1 Characteristics of FPT inflows..................................................................................... 11
2.2.2 Impacts of FPI inflows on economy ............................................................................ 11
2.2.3 Benefits of FPI inflows ................................................................................................ 14
2.2.4 Risks of FPI flows ........................................................................................................ 16
2.3 FPI inflows into emerging markets ............................................................................ 16
Chapter 3. Research Methodology .............................................................................................. 20
3.1 Research Strategy....................................................................................................... 20
3.2 Research Paradigm and Design ................................................................................. 21
3.2.1 Qualitative research ..................................................................................................... 21
3.2.2 Quantitative research ................................................................................................... 23
3.3 Data Analysis ............................................................................................................. 24
Chapter 4. Results and Discussion .............................................................................................. 26
4.1 Overview of FPI inflows through the Vietnamese stock market ............................... 26
4.1.1 Through securities listed on international stock market .............................................. 27
4.1.2 Through international investment funds ...................................................................... 31
4.1.3 General assessment ...................................................................................................... 38
4.2 Role of foreign investors towards Vietnam’s stock market ....................................... 38
4.2.1 Building model 1.......................................................................................................... 38
4.2.2 Assess the suitability of the model 1............................................................................ 40
4.2.3 Summary ...................................................................................................................... 40
4.3 Role of FPI inflows towards Vietnam GDP growth .................................................. 41
4.3.1 Building Model 2 ......................................................................................................... 41
4.3.2 Assess the suitability of the model 2............................................................................ 42
4.3.3 Summary ...................................................................................................................... 44
4.4 Discussion .................................................................................................................. 45
4.5 Summary .................................................................................................................... 48
Chapter 5. Conclusion and Recommendation ............................................................................. 49
Reference 50
Abstract
Although the Vietnamese stock market has officially been operating for almost 10 years,
FPI flows in Vietnam are limited. Added to this, initial financial integration has made the
managers embarrassing when facing with the movement of capital flows, especially FPI
flows. Therefore, the matter of attracting FPI flows in the current stage of deep integration
and fierce competition is mainly focused and emphasized by the State. For this reason, the
topic related to FPI flows in Vietnam has been chosen for this dissertation. Some methods to
attract FPI inflows through the Vietnamese stock market are introduced. Moreover, the
impacts of FPI inflows on GDP and the role of the foreign investors towards the capital
market to meet social needs in the integration phase are analyzed using the SPSS software.
Chapter 1. Introduction
1.1 Research motivation
Through more than 20 years of innovations, Vietnam has reached many great and
important achievements: there is such rapid and sustainable economic growth; GNP (Gross
National Product) has doubled in the past 10 years (Bojö, 2011). According to Kirby (2012);
Abbott and Tarp (2012), the economy moves from the shortage of food and consumer goods
to the surplus of goods and export; and the economy turns from bureaucracy mechanism to
socialist-oriented market mechanism; and the economy exists with many different economic
sectors. However, it is recognized that the defects during the innovation process, and that is
the burden of the approach to FDI (Foreign Direct Investment) and ODA (Official
Development Assistance) flows, with little regard to other potential flows such as FPI
(Foreign Portfolio Investment) (Vuong and Yokoyama, 2011; Bai et al., 2013; Thai, 2012).
This leads to serious consequences for Vietnamese financial market – “unbalanced
integration”, namely that FDI flow reaches over $4 billion while total accumulated FPI in
2006 was about $500 million only (Painter, 2012). Due to this imbalance, the enterprises with
FPI capital cannot transform their investments in the stock market, and thus, they cannot
possibly raise additional capital in the stock market or withdraw capital if necessary. The
risks such as economic slowdown, bureaucracy, corruption, social problems still exist and are
more complicated. In particular, the biggest challenge had to deal with in the long term is the
weakness of the economy with big development gap compared to other nations in the world
while the observation in Vietnam is in the stage where international competition is
increasingly fierce.
In recognition of these problems, the National Congress has built the 10-year economic
development strategy (2010 – 2020), emphasizing the objective of economic restructuring
towards industrialization and modernization. In order to achieve this goal, it is necessary to
make full use of domestic and foreign resources, in which foreign investment capital plays an
important role. Indeed, Athukorala and Tien (2012) reported that in recent years, the flows of
foreign investment capital into Vietnam have slowed down. Although the Vietnamese stock
market has officially been operating for almost 10 years, FPI flows in Vietnam are limited
(Wu et al., 2012). Added to this, initial financial integration has made the managers
embarrassing when facing with the movement of capital flows, especially FPI flows.
Therefore, the matter of attracting FPI flows in the current stage of deep integration and
fierce competition is mainly focused and emphasized by the State. For this reason, the topic
“Attracting FPI flows: The case study of Vietnam” has been chosen for my dissertation.
With this topic, the dissertation aims to introduce some methods to attract FPI inflows
through the Vietnamese stock market. Moreover, it is used the SPSS software to analyze the
impacts of FPI inflows on GDP and the role of the foreign investors towards the capital
market to meet social needs in the integration phase.
1.2 Research structure
Apart from introduction, the content of this thesis are included in four chapters as follows:
Chapter 2: Overview about theoretical and empirical studies related to FPI inflows.
Chapter 3: Methodologies used to achieve the study purposes
Chapter 4: Results observed on the status of attracting FPI inflows in the
Vietnamese stock market in recent time.
Chapter 5: Conclusion conducted throughout the study.
Chapter 2. Literature Review
2.1 International capital flow
Capital movement is the international transaction of purchasing real assets (manufacturing
equipments, real estate) and financial assets (stocks, bonds, loans, and claims to bank
deposits). Besides, there are other kinds of capital account transactions such as financial-
commercial credit, transactions on banking accounts, official and non-official aids. These
capital flows are recorded in the capital account of the balance of payment. One nation with
capital account deficit is the nation who has capital outflows recorded in the capital account
(when capital outflows exceed capital inflows) and this is a form of national saving. On the
contrary, one nation has capital account surplus when capital outflows are smaller than
capital inflows. Capital account is usually divided into two types, including FDI and FPI. The
greater the diversification and the interference between two funding sources are, the higher
the degree of financial integration is. In general, the international capital flow is divided into
FDI and FPI (Feldstein, 1999; Tille and Van Wincoop, 2010).
FDIs are capital inflows into the nation in order to hold the ownership and
operational control over domestic economic activities. FDI is mainly related to the
transactions on real accounts.
FPIs are indirect investment, including foreign loans of the Government or
domestic firms and investment flows of the International Investment Funds’
operations on domestic financial assets. Therefore, FPI includes the transactions on
the securities such as stocks, bonds, bank loans, derivative securities and various
forms of credit (trade, finance, or pledge)
However, the classification depends on each specific country. If Thailand classifies capital
flows into long-term loans, FDI, FPI, and other foreign investment types (OFI – the sum of
short-term loans of commercial banks and deposit accounts of non-residents in bath),
Malaysia classifies them into long-term loans, FPI and OFI (including both direct investment
inflows and short-term external debts of commercial banks). There are many factors affecting
the movement of international capital flows, some of them are listed as following:
According to Feldstein (1999), when capital flow moves freely, the Governments
have the authority over these capital flow movements into their nations. For
example, the Government in one nation can apply one special tax to the
accumulated income of domestic investors who have made investment in foreign
markets. This tax may be retaliated by applying such a similar tax to domestic
residents. And the result is a decrease in foreign investment of multination
investors.
Capital inflow movement is also influenced by capital control measures of each
nation (Tille and Van Wincoop, 2010). The application of these measures aims at
dealing with the structural weakness in the balance of payment of that nation. Even
such countries as Australia, Denmark, France, and Norway have applied some
methods to restrict currency transfer into foreign markets, though in recent years,
the situation is more open. Financial intermediaries are expecting that these
restrictions can be loosened and thus, they can have more intense competition on
the global basis.
Population structure also has impacts on the movement of capital flows (Börsch-
Supan et al., 2001; Domeij and Floden, 2006). In the 1980s, the US population is
generally young and young people need more funds than those in other basic
markets. As time passes, the average age of the US population increases and
capital deficit decreases, and thus, capital funding from non-American investors
also decreases.
De Cordoba and Kehoe (2000) reported that exchange rate fluctuations caused by
the investors on the securities can also affect the international capital flows. If the
currency of one nation is expected to be strong, foreign investors may be willing to
invest in the securities of that nation to benefit from currency fluctuations.
Conversely, capital inflows into one nation are expected to decrease if domestic
currency of that nation is weak, give other factors constant. In order to evaluate the
volatility of both capital outflows and capital inflows, it is necessary to consider all
factors simultaneously (Tille and Van Wincoop, 2010).
2.2 Impacts of FPI inflows on economy development
2.2.1 Characteristics of FPT inflows
Liquidity: FPI has high liquidity because it mainly focuses on the interest (with a
certain risk level) (Durham, 2004) or the safety of the security (with a certain
income level) (Goldstein and Razin, 2006), but not the management of actual
production process (Guerin, 2006). In other words, indirect foreign investors can
easily sell the securities they are holding to make investments on the markets
where the yield is higher and the level of risk is acceptable. According to Guerin
(2006), high liquidity of FPI makes this kind of investment have such a short term,
although stocks are considered as long-term investment forms and many stocks
have their term of more than one year.
Volatility: Because it is possible to make rapid changes to seek for higher yield or
obtain such a lower level of risk, FPI has the volatility and the reversibility
(Agarwal, 1997). The volatility, in a certain limit, can be beneficial if it provides
trading opportunities with high profits or arbitrage. These opportunities will attract
the investors and make domestic financial market operate more efficiently and
effectively. The volatility also points out that the market is looking for the best
capital allocation methods for current business opportunities. However, Goldstein
and Razin (2005) indicated that if the volatility occurs frequently and with high
level, it can lead to negative impacts on the economy in general and the financial
system in particular. Moreover, high liquidity, along with the volatility of FPI can
possibly cause the risk of massive withdrawal when there are changes in the
perspectives of the investors or internal as well as external economic conditions.
Diversity: Besides, FPI still exists in many different and complex forms such as
bonds, shares, commercial paper, or derivatives, including forward, future, and
options (Wilkins, 1999).
2.2.2 Impacts of FPI inflows on economy
Previously, high attention to FDI and care less about FPI inflows has been drawn in
previous section. However, the advent of the stock market and its operations help to attract
many foreign investors with a considerable amount of FPI which has become such an
external power for national economic development. Attracting more and more FPI inflows
will bring many benefits as follows:
First, FPI contributes to increase capital resources in the domestic capital market and
reduce capital cost through risk diversification. Durham (2003) reported that if FPI inflows
are used in order to finance new investment activities, these inflows will become such an
additional important capital source for domestic funds which developing nations are in need
of to promote their economic growth rate. Besides, Errunza (2001) presented that FPI allows
foreign investors to have chances to share their risks with domestic investors. FPI will make
domestic capital market more liquid and make risk diversification easier and as a result,
capital source becomes more abundant and capital cost becomes lower for the enterprises
(Dunning and Dilyard, 1999).
Second, FPI improves the development of financial system (Pal, 1998; Evans, 2002;
Durham, 2003; de Vita and Kyaw, 2009). FPI inflows promote the development of domestic
financial system through a variety of channels:
Along with indirect foreign investors, FPI with high liquidity contributes to
promote the local financial market with more efficient operations. When the
market has higher, deeper and wider liquidity, a variety of other investment
activities will be sponsored.
FPI also promotes the development of the stock market as well as the voting right
of the shareholders in the operating process. Once firms have the competition
about funding resources, the market will reward those with better operation
activities. Once the liquidity and market activities are improved, shares will reflect
the real value of these firms and this contributes to boost capital allocation in an
efficient and effective way.
The presence of foreign institutional investors (insurance companies, mutual funds,
and hedging funds) will help domestic financial institutions have chances to access
international capital markets, use new financial tools and techniques such as
futures, options, swaps, or other insurance tools. As a result, the risk of domestic as
well as foreign investors will be enhanced and the competitiveness of domestic
institutions will be improved.
FPI helps to enhance the discipline toward domestic capital markets. Indeed, with a
larger capital market, the investors will be more encouraged to expand their
resources in order to seek for new investment opportunities. Once firms have the
competition about funding resources, they have to deal with the pressures about
sufficient information related to both quantity and quality. The pressure about full
disclosure will contribute to improve the transparency and this may have positive
impacts on other economic sectors.
FPI promotes institutional reforms and improves the discipline towards the
Government’s policies. The volatility and the reversibility of FPI inflows force the
Government to implement such sound macroeconomic policies in order to reduce
budget deficits, inflation, external imbalance, as well as friendly economic policies
towards the market in general and foreign investors in particular.
Therefore, through various channels, FPI can provide additional funds for the economy
and strengthen as well as improve the activities of the domestic capital market. This
encourages better allocation of capital and other resources, creates opportunities for portfolio
diversification, improves the ability of risk management, and promotes national savings. As a
result, the economy will become stronger and economic growth rate will be enhanced.
However, the reality is not as simple as what economic theory indicates (Gooptu, 1993; Kim
and Wei, 2002; Knill, 2005).
Third, attracting FPI inflows in the international capital market will have less volatile
impacts on the domestic financial market. It is because doing business with securities will
take place in the foreign markets and have no impacts on the next movement of the capital.
However, stable access to the international capital market depends on positive assessments of
the investors towards the liquidity of the securities and the compliance of the issuers towards
market regulations (Batra, 2009). If the price of securities is unstable in the international
market, it will become very hard to issue new securities.
Fourth, excessive movement of FPI inflows will make domestic financial system become
more vulnerable and fall into crisis when facing an economic shock (Durham, 2004). If
domestic financial sector finds it hard cope with capital movement or is not carefully
regulated and supervised, the reverse of FPI inflows will lead to crisis. However, crisis can
occur without any regard to the fundamentals of the economy such as the impacts of
imperfect international capital market, external changes, or spread effects. According to Kim
and Wei (2002), the imperfections of the international capital market, along with its effects
such as adverse selection, herding behaviour, and moral hazard will have strong impacts on
the operations of domestic capital market and encourage the boom – the collapse of this
market.
Fifth, FPI reduces the independence of monetary policy and exchange rate policy. It
happens because along with the process of capital account liberalization, the Central bank of
nations can achieve one of two objectives: the independence of monetary policy or the
independence of exchange rate policy. Under the context of free capital movement, if the
Central bank wants to maintain an independent monetary policy, the non-compliance with
this rule will cause the conflicts among macroeconomic policies and lead to negative
consequences for the economy (Brennan and Cao, 1997).
2.2.3 Benefits of FPI inflows
International investment in general and portfolio investment in particular play an
enormous role in the economic development, increasing national reserves of foreign currency
and providing positive impacts on both the investing nations and the receiving nations
(Brennan and Cao, 1997). The role of international investment is increasingly becoming
meaningful for economic development in developing nations. In order to implement the
industrialization-modernization process, the demand for investment capital normally exceeds
the amount of current saving and thus, huge saving gap is created. Even this gap will become
wider due to the deficit in the balance of payment. Therefore, in order to supplement, Pal
(1998) presented that this shortage and establish the macroeconomic equilibrium, the
economy needs to raise huge amount of capital from the outsiders. By empirical methods, the
economists have demonstrated that investment capital contributes a large proportion to total
national income. The special importance of the capital is reflected when there is the lack of
this capital, labour resources or natural resources are just in the form of potential ones. In
order to exploit these economic resources, the economies are required to maintain such a
certain amount of capital. According to Harrod (1970) equation:
GDP = Investment ratio/ICOR
From the above equation, GDP growth has a positive relationship with investment ratio.
With a certain ICOR (Incremental capital-output ratio), the increase in investment ratio will
increase the growth rate and vice versa. In developing nations, ICOR is often high, and thus,
in order to increase GDP, it is required to have a greater amount of investment capital.
Investment capital includes FDI and FPI. However, current FDI becomes scare due to fierce
competition between nations in attracting FDI flows (Elton et al., 2009). Therefore, FPI flows
with its advantages need to be added to the economy as the perfect replacement for this
shirking FDI.
Indirect investment exists in the forms of risky capital investment, government bonds, and
corporate bonds. It has direct impacts on the outputs of the economy through the injection of
capital into the stock market. Egly (2010) reported that FPI flows help to increase profits for
the receiving nations, promote the effectiveness in financial market structure among fierce
competition, and exploit the international capital market more effectively. With the role as
the participant in the stock market, foreign investors have positive impacts on the
development of the market. They contribute to create the movement of FPI flows in the stock
market, enclosed with the changes which are happening in the world economy. The
movement of these capital flows makes contributions to rapid development, integration, and
internationalization of the stock market (Vohra, 2013). According to Hsu (2013), activities of
foreign investors also contribute to reflect the health of the economy in general and the stock
market in particular more properly. Reported by Todea and Pleşoianu (2013), in fact, the
Asian financial-monetary crisis has made the FPI capital flows into emerging markets fall
significantly in 1998 ($0.3 billion) and in 1999 ($4.8 billion); however, total net investment
capital into Asian nations increased slightly from $12.8 billion in 1999 to $13.2 billion in
2000. The main cause of increasing FPI flows is due to the policy of attracting the
investments on information technology – the foundation for economic recovery in the nations
who face the crisis.
With strong financial capacity and international experience, foreign investors contribute to
stabilize the stock market (Hsu, 2013). FPI capital will affect the economic development of
nations, especially promoting production and economic growth, expanding revenue for the
Government, creating jobs, and reducing the inflation rate. Economic development has
impacts on the stock market, helping this market grow and develop more. Besides, the stock
market can reflect the performance and the quality of each business (Egly, 2010). The stock
market is the place where foreign investors can observe, monitor and identify different fields
of domestic economic organizations, and thus, investment activities will become effective
because the price of shares can reflect the status of the company. Therefore, in order to attract
FPI capital for development, the firms are required to operate more efficiently and more
transparently. However, besides its positive role, there are some negative impacts of foreign
investors on the stock market.
2.2.4 Risks of FPI flows
Foreign portfolio investment can bring such benefits as increasing capital flows. Besides,
the disadvantages due to the change of capital flows mainly on portfolio investment and
foreign loans, and the risks in the financial market can be occurred as follows:
Most of foreign investors are those who have accumulated knowledge, experience, and
economic capability to conduct speculation activities or market manipulation. Speculation
can occur easily when many users together buy or sell a large number of securities of a
particular company. This collusion will create the shortage or artificial excess, making the
price of securities up or down dramatically (Aggarwal et al., 2010). Security fever makes the
property of investors become huge. With a large number of valuable assets, they are willing
to invest in other areas with higher risk but more attractive return. In the first stage, the
increase in the value of assets in the stock market has stimulated investment demand and
growth rate, leading to the increase of the inflation rate. When the price of securities tends to
fall, one of the chain reactions of the market is a massive withdrawal of foreign investors, and
thus, the prices in the stock market will fall sharply. Ekeocha stated that the objects who are
strongly affected are domestic shareholders, and therefore, there can be real explosion of
business risks.
Along with the decline in the stock prices, Dua and Garg (2013) added that sudden
withdrawal from portfolio investment can cause the pressures on the exchange rate,
especially when foreign investors have to transfer the income from the sales of shares into
foreign currency. The stability of domestic financial activities will be threatened if the
financial system does not ensure the ability to pay the debts, and foreign reserves are not
strong enough to resist risks. Therefore, in many cases, financial risk is the cause of the
financial crisis and economic crisis.
2.3 FPI inflows into emerging markets
FPI inflows into emerging markets during the period 1990 to recent can be divided into
three main stages:
Period 1990 -1996 with strong growth rate.
Period 1997 – 2001 with sharp decline.
Period after 2001 with the recovery.
The characteristics of FPI inflows into emerging markets can be listed as following:
First, compared to other capital flows, FPI flows into emerging markets during the period
1990 to recent were volatile and sensitive. This capital flow increased faster than in the
period 1990 – 1996, but decreased faster in the period 1997 – 2001. Compared to 1990, in
1996, FPI inflows into emerging markets had an increase of 217%, meanwhile, FDI inflows
just increased by 43.4%; banking loans increased by 906%, and ODA capital decreased by
47%. On the contrary, compared to 2001, FPI inflows into emerging market fell to 85% and
banking loans decreased by nearly 137%; meanwhile, FDI and ODA capital increased by
31% and 90% respectively. In the period 1990 – 2002, the proportion of FPI flows accounted
for 22.1% of total capital inflows. During the period 1990 – 1996, FPI flows accounted for
25%, higher than the average of 22.1%. Meanwhile, FDI flows accounted for 35%, ODA
accounted for 32%, and banking loans accounted for 8% of total capital flows. During the
declining period 1997 – 2001, FPI flows accounted for only 15%, meanwhile, FDI flows
accounted for 64%, banking loans accounted for 4.5% and ODA flows accounted for 16.5%.
Therefore, it can be stated that FPI flows are volatile over each period.
Second, in the FPI capital structure, bond capital has higher proportion and higher stability
than stock capital. On average, during the period 1990 to recent, bond capital accounted for
54.48% while stock capital accounted for only 45.52%. Besides, during the period 1990 –
1996 with growth rate, the proportion of bond capital (48.3%) was nearly equal to the
proportion of stock capital (50.7%); meanwhile, during the period 1997 – 2001 with sharp
decline, the proportion of bond capital (63%) was much higher than that of stock capital. This
means that the dynamics of FPI inflows in each period was determined mainly by the
dynamics of bond capital.
Third, FPI inflows are distributed unevenly among emerging markets. In terms of
geographical area, during the period 1995 -2002, Latin America and Caribbean region were
attracting the biggest proportion of FPI inflows (accounting for 34% of total FPI inflows into
emerging markets), followed by the East Asia – Pacific (about 25%), and Europe and Central
Asia (20%). Sub-Saharan Africa, South Asia, the Middle East, and North America are the
regions receiving FPI capital with low proportions respectively: over 10%, over 6.5%, and
over 4%. In terms of income and debts, emerging markets have medium income levels and
moderate debt levels and also must be at the top positions of attracting FPI inflows. Those
who attract the lowest amount of FPI are the nations with low income and heavy debt levels.
Notably, the ability to attract FPI capital in emerging markets depends more on income level,
rather than debt level of these nations. The evidence is that the nations with medium income
level and heavy debts can attract more FPI capital than those with low income level and
moderate debts.
Foreign private portfolio investment capital into emerging markets is the amount of
foreign private capital invested in equity securities and debt securities of emerging markets.
These capital flows have such basic characteristics as: highly-liquid, short-term, unstable, and
easily-reversed, and different and complex forms. Therefore, collecting data on these capital
flows is difficult and usually pointed out in the balance of payment.
These basic characteristics are the difference between FPI and FDI which are long-term,
stable, are difficult to be reversed. Besides, these two flows are different in terms of their
requirements as well as potential benefits for the receiving countries. FDI poses more
requirements for the real economy; meanwhile FPI posed more requirements for the financial
market. FDI promotes technology transfer or management skill transfer; meanwhile FPI
promotes the development of the capital market by enhancing the liquidity of the market.
However, these two forms of foreign investment have some similarities and have close
relationship with each other. FPI capital has multidimensional impacts on the receiving
nations. On the one hand, FPI contributes to increase the capital in the domestic capital
market, reduce capital cost through risk diversification, and promote the development of
domestic financial system, as well as institutional reforms and technical advance for the
Government’s policies. On the other hand, due to the excessive increase of FPI flows into the
country, the economy may fall into the phenomenon of overheating development, domestic
financial system becomes more vulnerable and faces the crisis when encountering an
economic shock; or FPI reduces the independence of monetary policies and exchange rates.
Since the 1990s, FPI capital has been strongly flowing into emerging markets under the
influence of many different factors, from national factors (potential growth, interest rate,
liberalization level) to market factors (the development of the stock market) and general
development trends of international finance (the invention of new tools, liberalization process
in developed and developing countries). These capital flows are characterized by high
volatility and high sensitivity compared to other capital flows, especially compared to FDI
inflows. FPI inflows always have low proportion compared FDI inflows and are distributed
unevenly among emerging markets in terms of revenue as well as region. There are two
conflicting viewpoints about the movement of foreign private capital flows: one viewpoint
supporting free movement of capital inflows and another viewpoint supporting capital
control. The viewpoint supporting free movement of capital inflows normally focuses on
positive impacts of foreign capital inflows; meanwhile the other viewpoint emphasizes
potential negative impacts of these capital inflows.
Regulating the movement of foreign private capital inflows is a set of policies and direct
or indirect control measures (capital controls) towards the movement of foreign private
capital inflows in order to ensure that domestic financial system in particular and the whole
economy in general operates strongly, safely, and effectively (ensuring the stability and
promoting the development of domestic financial system, promoting the desirable
investments and sponsorship agreements and restricting the undesirable forms or investment
strategies, enhancing the independence of economic and social policies, and avoiding any
external dependence). In order to regulate the movement of foreign private capital inflows,
including FPI inflows, emerging markets can apply a range of different policies by regulating
exchange rates, tightening finance, and controlling capital inflows, or regulating banking
system, and building the system to collect and process information about capital inflows or
outflows. These policies can be done statically or dynamically through administrative
measures or market-oriented measures or the combination of these measures. Regulatory
policies towards the movement of FPI flow in particular and foreign capital flows in general
are placed in general development strategy of the economy. They are implemented in a
comprehensive and consistent, as well as flexible manner and are adjusted to suit actual
internal and external situation.
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