The Nexus between international capital flows and nation branding

Abstract

In this paper, we seek to assess the nexus between international capital flows and the various factors which have significant impact on a country’s ability to attract inward foreign flows. Such factors include the level of financial market development, institutional quality, natural resources’ endowment, infrastructural development, human capital development, trade and capital openness, economic growth prospects, amongst others. Due to the diversity of the aforementioned factors, researchers in recent years have coined the term “nation branding” to collectively refer to all characteristics which can be used to describe a country with respect to its economics contributors. The emphasis on inward foreign capital flows is based on their ability to complement domestic savings and other internal efforts by governments, in a bid to ensure that productive sectors of the economy are adequately funded at all times. We argue that developing countries need to shed their dependence on aid, by rather attracting permanent foreign direct investment (FDI) capital flows, which would have a positive impact on the economy. However, the attraction of international capital flows has to occur in line with enhancements within the country that would serve to entice those with excess funds to invest these in a conducive host country, offering not only higher returns than would be realised in the investors’ home country, but other value-additions such as sound institutional quality, availability of adequately developed financial markets, reliable infrastructure (communication and transportation), and a large, skilled pool of labour; and this is amply supported by the findings of this paper. Our recommendations are that developing nations should adopt a holistic approach to potential investment assessment, prior to accepting such offers. Oftentimes, there are terms and conditions which would be detrimental to the host country, but greed tends to inform political decisions, rather than policy or a cost-benefit analysis at the very least. Future studies should consider quantifying aspects such as carbon footprint which would harm countries more than they would potentially benefit financially and from other spill overs such as new technology or employment creation.