Global capital flows to developing countries increased significantly during the nineties. In view of the East Asian financial crisis and Latin American experience, which type of inflow is good for the host country?

Foreign Direct Investment is considered the most stable and beneficial form of capital inflow for a host country. Unlike commercial loans or external commercial borrowings, FDI does not create a debt obligation that must be repaid with interest regardless of economic conditions.

Unlike Foreign Portfolio Investment, which is often called hot money because it can be quickly withdrawn by investors during market volatility, FDI involves long term commitment in physical assets like factories and infrastructure. This stability makes a country less vulnerable to sudden capital flight, which was a primary cause of the East Asian financial crisis and the Latin American debt crises. Additionally, FDI brings in new technology, management expertise, and employment opportunities.