Capital Flows and Investment

This report uses the 2021 Global Opportunity Index and its different categories to provide an overview of Latin America's attractiveness to foreign investors, especially when compared to other emerging markets and developing economies (EMDE). It also offers an in-depth look at Latin America's global capital inflows (emphasizing their composition and evolution over the past decade) and the regions' cross-border M&A activity. Overall, the report highlights that many of the main challenges to foreign investors (and, more broadly, to a sound investment climate in the region) stem from the lack of a strong, transparent, and predictable legal framework, including well-functioning legal and judicial systems. Thus, the analysis suggests that Latin American governments must take concrete measures to strengthen the rule of law and tackle the pervasive corruption that undermines public trust.

Since embarking on its era of economic growth and expansion in 1979, China has played an increasingly large role in the global economy. In addition to becoming the world’s largest manufacturer and world’s leading exporter in 2010, it now ranks as the world’s second-largest economy. California—itself the world’s eighth-largest economy and the principal trade gateway between the United States and China—has been a key beneficiary of this growth. Not only is China a major market for exports and imports for the state, but it has grown into one of the leading international investors in California. This relationship between China and California has become increasingly complex, particularly since China’s entry into the World Trade Organization in 2001. China’s accelerating export engine has had a significant impact on California, with the state capturing the largest flow of Chinese exports into the U.S. The state has also seen a dramatic increase in its exports to China, as trade relations between the two have strengthened. In fact, between 2007 and 2014, California established itself as the single largest exporter to China, with more than $104 billion in exports, or 13.8 percent of the U.S. total.1 In terms of imports, California was even more successful, capturing an impressive 17.2 percent of Chinese imports by 2014. 6,000 per person.2 California and China stand to benefit mutually from their strengthening ties. The key will be to effectively leverage the opportunities California provides, in areas such as innovation and real estate, with China’s desire to find productive returns on its investments and to strengthen its global presence.

In 2015, China’s capital outflows and stock volatility had been top of mind. This report is the first in a series to summarize the most pertinent information on Chinese capital flows. Key developments of last year were the changing expectation of Renminbi depreciation and ill-designed policy decisions that fueled market volatility. At the same time, after years of rapid credit expansion amid declining return on investment, signs of stress have surfaced in China’s financial system in the form of bank’s balance sheets.

Analyzing policies that aim to preserve macrofinancial stability is challenging because of the many unintended consequences that arise from the highly complex and integrated connections among global banks and U.S. financial markets. A full assessment of the many policies implemented since the 2008 crisis is even more challenging because they were crafted in isolation and implemented with little coordination. A decade later, it is apparent that monetary policy and macroprudential regulations must advance beyond identifying and managing the unintended effects of individual policies to assessing their combined impact on behavior in financial markets and the accompanying induced changes to bank business models.

Private capital markets have become a favored alternative source of company financing. In addition, private equity firms have become more innovative in developing options for financing the growth of small and emerging firms, and converting many publicly listed companies into private companies. Consequently, more companies are choosing to be privately owned, or are staying private for longer periods before becoming publicly listed.

Based on the 2016 edition of the Milken Institute Global Opportunity Index, the report assesses the attractiveness of Asian countries to foreign investors and provides a closer look at the composition of Asia’s capital inflows. The region is strong when compared to the rest of the world, especially in terms of business perception, but would benefit from a harmonization in the financial infrastructure and from a deepening of its financial markets. There is significant potential for capital flows, FDI and portfolio flows, to play a greater role in financing investment, but this will depend on financial integration of the region’s peripheral markets.

While large businesses have resumed international trade at levels seen before the financial crisis, small- and medium-sized enterprises (SMEs) have not fared as well. For these firms — the backbone of economies everywhere — growth is impeded by the limited availability of bank loans to finance trade. The problem is especially acute for SMEs in Asia, the world’s largest trading region and the one most reliant on trade finance. This report points out the major impediments to financing in the region and recommends regulatory and procedural changes. It assesses the state of trade finance in Asia, paying particular attention to the ASEAN countries and the needs of SMEs. It emphasizes that to succeed, regional efforts to integrate trade law and procedures must be combined with the replacement of paper documents with electronic transactions, as well as standardized procedures across countries. For investors, the use of trade receivable assets, through securitization or direct investment, could be an attractive alternative in an environment of low interest rates. They offer appealing alpha yields, consistent returns, low volatility, “real economy” investment, and lower default rates than other interest-based assets. Also, the behavior of these assets can be uncorrelated to the market, offering portfolio risk diversification.

Based on the 2016 edition of the Milken Institute Global Opportunity Index, the report assesses the attractiveness of Asian countries to foreign investors and provides a closer look at the composition of Asia’s capital inflows. The region is strong when compared to the rest of the world, especially in terms of business perception, but would benefit from a harmonization in the financial infrastructure and from a deepening of its financial markets. There is significant potential for capital flows, FDI and portfolio flows, to play a greater role in financing investment, but this will depend on financial integration of the region’s peripheral markets.