Capital outflow: Threat or catalyst for economic growth?

Anna Drahozalova

A chapter in CNB Global Economic Outlook - April 2025, 2025, pp 15-20 from Czech National Bank, Research and Statistics Department

Abstract: Whereas there has been a long-term intensive debate about the benefits and costs of significant foreign equity control of Czech businesses, much less attention is paid in the opposite direction – outgoing investment from the Czech Republic to other countries. This is true even though a significant downturn in the inflow of new strategic investment can be observed in recent years, while external surpluses and growing economic prosperity have enabled the Czech Republic to have a larger outflow of capital to other countries. This article therefore looks at two major economies that have experienced capital outflows for many years – the USA and Germany. These countries are the largest investors in foreign markets and the impact of capital outflow on domestic activity differs in the two cases. Foreign equity investments flowing from the German economy are more often motivated by the transfer of the final parts of the production chain with the aim of serving the localmarket. Such investments substitute forGerman exports and tend to suppress investment activity there. By contrast, the data indicate that US multinationals use their foreign branches mainly to produce intermediate products efficiently and they are then re-integrated into domestic production, which has more of a stimulative effect on US investment activity. In addition, the example of the German economy conflicts with classical thinking, where a current account surplus is seen as always desirable. This is because persistently high surpluses signal either excessively high savings or insufficient investment, which may indicate deeper structural problems in an economy.Book-Title: CNB Global Economic Outlook - April 2025

Date: 2025
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