Capital flows to the developing, substantially private flows, have taken the center stage in meeting their financing needs. Especially in the wake of economic liberalization by many countries and as official development assistance flows declined as a ratio of gross national income of the aid-extending richer nations. Governments and private sector in the developing countries, especially emerging market economies, depend on such flows both for investment and trade financing needs. A large part of private flows is made up of foreign direct portfolio investments channeled to several countries while debt is raised by corporate in international capital markets or through commercial borrowings from banks abroad. These private flows have eclipsed official loans, partly concessional, that developing countries had been securing from bilateral creditors and multilateral financing institutions like the World Bank. Even the relatively low share of official aid and debt has been turning increasingly negative as developing countries service past official loans and there has been no increase in official financing in real terms.
On the other hand, private capital flows by way of bonds rise in international capital markets, syndicated commercial bank lending, and investment flows, direct and portfolio and short-term debts have been on uptrend. For many underdeveloped and poorer countries, especially in sub-Saharan Africa which cannot easily rise capital abroad, official development financing continues to be important as private flows go only to credit worthy and growing economies.
According to the World Bank‘s Global Development, the larger private flows are driven by mergers and acquisitions, privatizations peripheral debt refinancing and strong investor concern in bond markets of Latin America and Asia and in its local currency. Most of the private capital flows, however, go to small number of middle-income countries and this is especially true of foreign direct investments which are attracted by fewer countries.
Although most countries prefer and are trying to provide a conducive policy framework for FDI, these flows have for years been uneven as they go mostly to select countries and regions. A large part of global FDI flows into developed nations was due the take-overs and mergers and acquisitions of firms. The outlook for capital flows to development countries depend on the sustainability of current global expansion. The foreign investor appetite for emerging market resources could dissipate somewhat if home country interest rates go up. Most developing countries, reeling under the impact of recession have exhausted their surplus and have become vulnerable to shocks.