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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

If a developing country needs foreign capital inflows, management expertise, and technology, how can it encourage foreign investors while at the same time protect itself against capital flight and banking system collapse, as happened during the Asian financial crisis?

To determine

The ways to encourage foreign investment while safeguarding the country against capital flight and banking crisis.

Explanation

Foreign investment brings technology, management expertise, etc. into the host country. Foreign investment can be broadly classified into FDI and FPI. FDI is Foreign Direct Investment is the physical investment in home country by foreign business entities. It includes acquisition of businesses (mergers and acquisitions), setting up of production units, setting up infrastructure, etc. On the other hand, FPI is Foreign Portfolio Investment is foreigners’ investment in home country’s stocks, bonds and other financial instruments.

Capital flight refers to large outflow of funds from a country due to events concerning political and economic instabilities that lead to loss of confidence among the investors...

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