Question

4. How would the following transactions affect your country's net capital outflow? Also, state whether each involves direct investment or portfolio investment. a. A local mobile phone company establishes an office in the Czech Republic. b. Harrod's of London sells shares to a pension fund in your country. c. The Swedish car company, Volvo, expands its factory in your country. d. A local mutual fund sells its Volkswagen shares to a French investor.

Answer 1

The credit side of capital transaction include those transaction that inflow the money into country.

The Debit side of capital transaction include those transaction that outflow the money from country.

Net outflow=sum of all Debit - sum of all credit

A transaction entered in credit Decrease net capital outflow

A transaction entered in debit Increase net capital outflow.

Direct Investment include Investment that is associated with Increase in capital stock for example building a new factory, owning a existing company.

Portfolio Investment include buying and selling of shares.

A) establishing a office in foreign is foreign direct Investment and also The money is going outside. So it will entered in debit and net capital outflow Increases.

B) selling shares is portfolio Investment.

The harrold selling shares to our country or we are buying shares of foreign company.,so money is going outside.,so it will be entered in debit and net capital outflow Increases

C) Establishing a new factory is direct foreign Investment.

Because factory is establishing by foreign company into our country,so money is inflowing into country,so it is credit transaction,so net outflow Decreases.

D) selling shares is portfolio Investment.

The foreigners are buying shares ,so money is coming to country ,so it is a credit side transaction,so net capital outflow Decreases