Another powerful agent of international economic relations is capital. The financial capital flows across the national boundaries
have been increasing following the wave of globalization in 1980's. Previously, the countries allowed mobility of capital and labour, within the national boundaries but in the recent period, a large scale capital and labour mobility has been taking place among the nations and changed the pattern of economic development in a significant
way. There are two types of international capital movements. One is foreign direct investment and another is foreign Portfolio investment. FDI refers to movement of capital that involves ownership and control. In case of FDI, the investor retains control over the invested capital and FDI and management go together. FDI is related in the context of Multinational Corporation or the transnational corporation. Here the production is taking place in plants located in two or more countries but under the supervision and general direction of the head quarters located in one country.
On the other hand, Foreign Portfolio investment does not involve ownership or control but the flow of 'financial capital' rather the 'real capital'. In this case, the investor does not retain control over
the invested capital only he lends his capital in order to get a return on it but he has no control over the use of that capital.
Like the movements of labour, there are certain reasons for the movements of capital too. The causes of capital movements are :
1. Growing market for products: Different firms and industrial companies invest abroad in response to large and rapidly growing markets for their products. For example, many firms from U.S., Japan, Germany and South Korea are investing in India and other Asian countries mainly to seek advantage of rapidly growing markets of those countries.
2. Access to Raw Material: The foreign companies invest in other countries to secure access to mineral or raw material
deposits located there and then process and sell them in more finished form.
3. Low relative wages: A foreign firm may consider investment in a host country if there are low relative wages in the host
country. The existence of low wages because or relative labour abundance in the recipient country such as India, China, Vietnam, Indonesia is an attraction when the
production process is labour intensive.
4. To protect market share: Sometimes firms invest abroad for defensive purposes to protect market share.
5. For risk diversification: Firms often invest abroad as a means of risk diversification. By doing so they can avoid recession prevailing in some parts of the world. If a recession or downturn occurs in one market of industry, it will be beneficial for a firm not to depend upon one market.
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