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?

The East Asian financial crisis (1997-98) and Latin American debt crises highlighted the risks associated with volatile capital flows, particularly short- term debt (commercial loans, external commercial borrowings) and foreign portfolio investment (FPI). These types of inflows can be quickly withdrawn during times of economic stress or changes in global sentiment, leading to currency depreciation, liquidity crises, and economic instability in the host country. Foreign Direct Investment (FDI), in contrast, involves establishing or acquiring lasting interests in enterprises in the host country, is long- term in nature, less liquid, and tends to be more stable. FDI brings not just capital but also technology, management expertise, and access to new markets, making it generally considered the most beneficial and least volatile type of capital inflow for developing countries.