The negative sign of outflows means the disinvestments by domestic investors in foreign economies, so actually it is inflows because domestic investors are pulling money from abroad to local economy, in contrast, the negative sign of inflows means the foreign investors are pulling money from the local economy to their home abroad, so it is actually outflows. IMF uses this method which is known as "BPM6" to report capital flows. Bear in mind that the outflows of FDI, FPI and other investments are reported as an assets and the inflows of FDI, FPI and other investments are reported as liabilities. With that being said, how could we calculate the net capital inflows and outflows? For more clarification I have added an attachment of Argentina's capital flows for the year 2000, Argentina had positive FDI and FPI outflows in that year for quarter 1, but other investment outflows were negative, so that means that other investment outflows are actually inflows because of the investments repatriated home by domestic investors. In the same period, in terms of inflows, Argentina had positive FDI and FPI inflows, but the other investments inflows were negative, so the other investments inflows are actually outflows. Therefore, in order to calculate net capital inflows we add the absolute value of the other investment outflows to the positive values of FDI and FPI inflows(|-other investments outflows|+FDI inflows+FPI inflows). The same thing for net capital outflows, we add the absolute value of negative other investment inflows to the positive values of FDI and FPI outflows (|-other investments inflows|+FDI outflows+FPI outflows).
Am I right???
Dear Aboubakr
FDI and FPA are similar. FPI is when an investor buys (sells) stocks, bonds, and other financial assets in a foreign country adopting a passive portfolio investment position causing that foreign country to have a positive (negative) FPI (also called an inflow(outflow)). Whereas FDI is when an investor buys (sells) stocks and other financial partnership assets in a foreign country and actively manages/controls his investment (typically having a significant controlling interest) causing that foreign country to have a positive (negative) FDI (also called an inflow (outflow)). See
https://www.imf.org/external/pubs/ft/bopman/bopman.pdf
Dear Sir,
Yes, you are right, capital inflows and outflows can be decomposed into FDI, FPI, banking and other investments flows, but sometimes one of these components or two or may be all can be negative, so I was wondering how we can get the gross inflows from all of the components, for example, India in the fourth quarter of 2008 had the following capital inflows:
FDI: 6872.221763 (positive)
FPI: -5786.799532 (negative)
Other investments: -2651.317593 (negative)
To get the gross capital inflows, do we ignore the negative sign and sum up the numbers, in this case the gross inflows will be of course positive, or we consider the negative values and subtract it for the positive value, in this case the gross inflows will be negative?
I'm confused, because in one of the articles "Capital flows are fickle: anytime, anywhere"of Bluedorn et al. (2013), they defined the gross inflows and outflows as follows:
Gross capital inflows arise when the economy incurs more external liabilities (inflows with a positive sign) or the economy reduces its external liabilities (inflows with a negative sign). Thus, gross inflows are net sales of domestic financial instruments to foreign residents. Gross capital outflows arise when the economy acquires more external assets (outflows with a positive sign) or the economy reduces its holdings of external assets (outflows with a negative sign). Thus, gross outflows are net purchases of foreign financial instruments by domestic residents.
Based on this definition, it seems that we just sum up the whole components regardless of the sign.
Any thoughts?!
Dear Aboubakr
Your above statement is accurate. I think the interpretation confusion arises when you are distinguishing between gross and net flows and decomposing to inflows and outflows. Capital (whether FDI or FPI, classified by the country government) inflows are positive on the BOP whereas outflows are negative on the BOP. You sum up the flows (positive and negative) to get the net flow. If the net flow is positive that is an inflow. If the net flow is negative that is an outflow. The numbers can swing dramatically from quarter to quarter as capital can be liquid. And the reporting system is imperfect; captured by the BOP (IMF format) of statistical discrepancies previously called net errors and omissions.
Sorry for the late reply, however, the IMF has changed the reporting method of capital flows from BPM5 to BPM6 since 2007, what you said is true under BPM5 where capital outflows are reported negative and inflows are positive, so any positive difference actually means inflows. Under BPM6 the signs changed where outflows are positive and inflows are negative, so the negative difference means inflows, more details can be found in the document below
https://www.cbr.ru/eng/statistics/credit_statistics/matrix_e.pdf
Empirically, especially if you are testing the volatility of the net flows, I think the signs have to be resorted as in BPM5.
I think IMF BPM6 is more in line with definition of asset and liability in accounting. An inflow should be a liability to the host country From the perspective of creditor/investor who is entitled to a return while outflow of investment is an asset.
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