Chapter7

TheInternationalFinancialArchitectureandEmergingEconomiesINTERNATIONALMONETARYANDFINANCIALECONOMICSThirdEdition1

InternationalFinancialArchitectureTheinternationalfinancialarchitectureisthesetofinternationalinstitutions,governmentalandnongovernmentalorganizations,andthepoliciesthatgovernactivityintheinternationalmonetaryandfinancialmarkets.2

InternationalCapitalFlowsGrowthinforeigndirectinvestment(FDI)isoneofthemostimportantdevelopmentsininternationalcapitalmarkets.AnFDIinflowisanacquisitionofdomesticfinancialassetsthatresultsinforeignresidentsowning10percentormoreofadomesticentity.AnFDIoutflowisanacquisitionofforeignfinancialassetsthatresultsindomesticresidentsowning10percentormoreofaforeignentity.3

MergersandAcquisitionsCross-bordermergersandacquisitionsareadrivingforceofrecentgrowthinFDIinthedevelopedeconomies.Cross-bordermergersandacquisitionsentailcombiningoffirmslocatedindifferentnationsinwhichonefirmabsorbstheassetsandliabilitiesofanotherfirm(merger)orpurchasestheassetsandliabilitiesofanotherfirm(acquisition).4

Cross-BorderMergersandAcquisitionsDuring1990-2000,MAinflowsofthedevelopednationsincreasedbymorethan500percentwhileinflowsofthedevelopingnationsincreasedbynearly600percent.5

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NetCapitalFlowstoEmergingEconomiesDespiterecentfinancialcrises,privatecapitalflowstotheemergingeconomieshavegrownataremarkablerate.12

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EmergingEconomiesoftheWesternHemispherePriortothe1994Mexicanpesocrisis,alargeportionofFDIinflowsconsistedofportfoliocapital.Since1994,FDIflowsareagreaterproportionofthetotalcapitalflows.14

EmergingEconomiesofAsiaThoughtheemergingeconomiesofEastAsiaattractedsubstantialFDIflowsduringthemid-1990s,theyreliedheavilyonportfolio,bankloans,andotherformsofshort-termcapit