Capital Flows

The movement of money for investment, commerce, or commercial activities.

The movement of money for investment, commerce, or commercial activities is referred to as capital flows. These include the flow of funds within a company in the form of investment, spending on operations, and research & development.

Capital flow statistics, of all the data on international economic transactions in the United States, are the most prone to inaccuracies and gaps. 

Even though the United States gathers as much detailed data on its cap flows as any other country in the world, the surge in direct and portfolio investments across national borders in the 1980s outpaced improvements in the statistical system that tracks them. 

The current system is set up to collect the majority of data on international capital flows from a group of large financial intermediaries and enterprises. 

Nonetheless, global financial market integration and advances in electronic and communications technology have significantly increased the number of financial transactors and permitted new forms of transaction, bypassing traditional financial intermediaries and channels.

Under the current reporting methods, capturing full and accurate flows has become increasingly difficult and costly due to this transition. 

Furthermore, the increasing number of new financial products has outpaced current data coverage, making it even more incomplete and erroneous.

Because these flows are large and poorly quantified, efforts to acquire accurate and complete data on quickly rising flows could pay off handsomely in terms of improving the utility of existing data on US international transactions. 

In reality, capital movements have outperformed trade flows during the last decade. 

Importance of Capital Flows 

Information on cap flows is required by : 

  • The extent of the US economy's internationalization; 

  • The changing operations of US financial markets; the impact of foreign direct investment on the domestic economy; 

  • The income on US international investments and the net servicing burden on US external indebtedness; and 

  • The relationship between foreign capital flows and US interest and foreign exchange rates requires information on capital flows. 

Furthermore, because net capital outpours should equal the balance of foreign goods and services transactions and transfers (the current account), better data on these flows would assist in clarifying the correctness of data on the US current account.

Improved data would also help the Bureau of Economic Analysis (BEA) make more precise assessments of the US overseas investment position (which measures the value of accumulated stocks of US assets abroad and foreign assets in the United States).

More importantly, better data on international capital transactions can help prepare the US economy's flow-of-funds accounts and balance sheets (both published by the Federal Reserve). 

The flow-of-funds accounts break down the sources and use of savings in the United States by industry and transaction type. 

Households, non-financial businesses (corporate & non-corporate), state and local governments, the federal government, foreigners, and financial institutions, such as banks, savings and loan organizations, life insurance companies, and pension funds, are all included in the sectors.

The flow-of-funds accounts and BEA's national income and product accounts provide an integrated set of financial accounts for analyzing economic developments in the United States. 

Data on international transactions from bank regulatory reports and the TIC reporting system are major inputs to the flow-of-funds accounts. 

The data is modified and augmented with other data on transactions from bank regulatory reports and the TIC reporting system to make it compatible with the flow-of-funds accounts' sector and instrument classifications. 

Foreign data is also utilized to calculate aggregate levels of outstanding debt by sector and national net worth measurements. 

The flow-of-funds accounts have proved helpful at the Federal Reserve in measuring the impact of monetary policy and the general financial conditions of various sectors. 


Official and private capital flow transactions are the two main categories of capital flow transactions. 


Changes in the reserves of US monetary authorities in monetary gold, foreign exchange, special borrowing privileges at the International Monetary Fund, and loans and credits to foreigners by US government agencies are all examples of official capital movements in the United States. 

BEA estimates official capital poured quarterly based on statistics provided by the Treasury, the Federal Reserve System, and the International Monetary Fund (IMF). 

Transactions in US Treasury securities, other US government liabilities, bank deposits, and US business bonds and equities can change official foreign assets in the United States.

Treasury securities, other US government obligations, bank deposits, and US business bonds and equities are all examples. BEA calculates these transactions quarterly using data from the Treasury and several other US government entities with relevant data. 

The flow-of-funds accounts and BEA's national income and product accounts provide an interconnected and comprehensive set of financial accounts for analyzing economic developments in the United States, too. 

Data on international transactions from bank regulatory reports and the Treasury International Capital (TIC) reporting system are major inputs to the flow-of-funds accounts. 

This information is amended and augmented with other records on international transactions from bank regulatory reports and the TIC reporting system to make it compatible with the flow-of-funds accounts sector and instrument classifications.

The flow-of-funds accounts have proved helpful at the Federal Reserve in measuring the effect of monetary policy and the general financial conditions of various sectors. 

The Federal Reserve's Federal Open Market Committee monitors the domestic non-financial debt aggregate metric obtained from the flow-of-funds accounts. 

In the academic and commercial worlds and elsewhere in government, the accounts are frequently used for several objectives. 

The weekly Flow of Funds Accounts, the semiannual Balance Sheets for the US Economy, and the annual Financial Assets and Liabilities are all examples of flow-of-funds publications.


Direct investment and portfolio investment by US residents overseas and foreigners in the United States are included in private capital flows. 

Direct investment is defined as "the ownership or control, directly or indirectly, by one person of 10% or more of the voting securities of an incorporated business enterprise or an equivalent interest in an unincorporated business enterprise." 

Portfolio investment is defined as "any international investment that is not a direct investment." The IMF's Balance-of-Payments Manual provides general guidance for these criteria.

Income from direct and portfolio investments is reported in the current account, whereas exchanges of financial assets between US and foreign persons are assessed in the capital account. 

BEA compiles and publishes the value of accumulated stocks of US assets abroad and foreign assets in the United States, as a result of these movements in and out of the country over time, every year in the statement of US international investment position.

BEA and Treasury are responsible for acquiring information on private capital flows. It uses Federal Reserve banks as agents to collect data on direct investment and Treasury, as well as data on portfolio investment.

The pressure on both BEA and Treasury to collect adequate information on these burgeoning transactions has increased since the 1980s, with the influx of foreign direct investment in US industries such as manufacturing, wholesaling, and retailing. 

Banking, securities, finance, and other services, and the surge in foreign portfolio investment in US securities during the same period, have had a similar effect. 

Now, let us dive into how exactly one collects data for direct and portfolio investments. 

Direct Investment Data

Since the 1920s, the BEA (and its predecessor, the Office of Business Economics) has been gathering data on US direct investment overseas and foreign direct investment in the US. 

It has expanded its scope, moving from optional enterprise reporting to more thorough mandated reporting. The International Investment and Trade in Services Survey Act currently provides legislative permission to collect direct investment statistics.

The BEA employs a survey hierarchy to track both US direct investment overseas and foreign investment in the US. Benchmark surveys (censuses) are conducted every five years, as well as annual and quarterly surveys.

US direct investment overseas and foreign direct investment in the United States are surveyed separately. 

Direct investment surveys collect data on affiliates' operations, including: 

  1. Production, 
  2. Sales, 
  3. Trade, 
  4. Employment, 
  5. Financial statements,
  6. Technology, and 
  7. External funding, etc. 

Benchmark surveys are thorough and include the whole population of filers; exemption levels are low. 

The benefits of these benchmark surveys are as follows: 

  • Any relevant data on a direct investor's share of income, distributed earnings, capital gains and losses from its foreign affiliates, as well as interest, royalties, fees, allocated expenses, and changes in a direct investor's equity and debt positions in its foreign affiliates. 

  • Financial structures and operations of parent firms and affiliates, such as balance sheets and income statements, the composition of external financing, production, employment, trade, as well as technology, property, plant, and equipment, are also addressed.

  • The annual surveys enhance the data that enters the balance-of-payments accounts by including the operational characteristics of the affiliates (for example, sales and employees). 

BEA publishes the results of these surveys in detail every year. 

In 1988, the survey on US direct investment overseas included 9,500 US companies and their affiliates, while the survey on foreign direct investment in the United States included 5,500 US affiliates of foreign corporations. 

Quarterly surveys are required to collect information for balance-of-payments purposes.

The universe of direct investors is significantly skewed toward large corporations and heavily skewed toward investors that own 50% or more of a company. 

E.g., the ten largest US parent corporations owned 32 percent of the assets of international affiliates, while the top 100 owned 72.4 percent. Smaller overseas affiliates (with less than $15 million in assets) make up 47% of the total number of affiliates but just 5% of the assets. 

Portfolio Investment Data

The Treasury International Capital (TIC) reporting system, which uses Federal Reserve banks as agents, provides data on portfolio investment holdings and transactions monthly and quarterly. 

Portfolio investment includes debt instruments between unaffiliated parties, less than 10% equity positions, and other claims and liabilities. 

Treasury uses a variety of TIC forms to track securities sales and purchases, as well as the amounts of outstanding claims and liabilities reported by banks and non-banking entities. 

The TIC S forms cover securities transactions; the TIC B forms cover banks' claims and liabilities and custodial transactions; and the TIC C forms cover nonbanks' assets and liabilities concerning unaffiliated foreigners, such as foreign trade credit by corporations.

On sales and purchases of the long-term US and foreign securities, TIC S forms must be filed (original maturities longer than one year). 

Filers include banks, banking institutions, brokers, dealers, and other US-based participants in these transactions and firms issuing Eurobonds directly from their US offices. Monthly sales and purchase reports are required. 

Reports must be made if the total of purchases or sales within a particular month exceeds $500,000.

Loans, advances, and overdrafts; placements of funds; acceptance financing and depositing; and borrowing through repurchase and resale agreements are all reported on TIC B form filings by US banks, depository institutions, international banking facilities, brokers, and dealers in the US.

Operating transactions between US banks and their international branches, agencies, and subsidiaries, as well as those between foreign banks' US branches, agencies, and subsidiaries and their parent corporations, are also included on the form.

Monthly or quarterly reports are necessary depending on the institution and form involved. Banking data is based on monthly positions as of the month's end. Both transactions for the banks' accounts and the accounts of their domestic and international customers are reported. 

If total claims against, or obligations to, foreigners total $15 million or more for any month-end closing balance, reports are needed.

Non-Banking companies must submit TIC C forms every quarter. Examples of such companies are exporters, importers, industrial and commercial firms, some non-banking financial institutions, and US affiliates of foreign corporate enterprises. 

Financial claims or liabilities (such as deposits in foreign banks or direct borrowings from foreign investors) and commercial claims or liabilities (such as sales of products and services in normal business operations) are examples of transactions (for example, trade credits). 

Direct investment flows are not taken into account. Financial or commercial claims on unaffiliated foreigners, or liabilities to them, totaling $10 million or more at the end of the quarter must be reported.

Limitations of the Data

Data on direct investment appears to provide a generally accurate picture of these transactions under present reporting systems, while issues persist. The data on portfolio investment, on the other hand, is dubious. 

The expanding number of financial transactors, goods, and intermediaries has a significant impact on portfolio investment. As a result, BEA and Treasury have run into increasing technical and operational issues when generating capital movement data. 

The accuracy and timeliness of data have been impacted by the growing complex nature of the transactions and the less-than-satisfactory compliance by filers. Despite attempts by the BEA and Treasury to expand data coverage and update filer lists, considerable data gaps still exist.

Even if it is acknowledged that data on US direct investment abroad is of high quality, especially given the complexity of US companies' financial structures, revisions of quarterly data do occur when late reports are received and errors are discovered. 

Because capital flow data is variable and vulnerable to sign reversals, BEA normally does not attempt to enlarge or blow up reported capital flow data to account for late answers. 

However, BEA intends to investigate the viability of integrating direct investment capital flows and a late report allowance, especially if systematic patterns of late-reported data can be detected.

Another flaw is that, beyond the balance-of-payments requirements, a large range of economic and financial data gathered on operations between parent firms and their affiliates isn't adequately integrated and presented, making it difficult to use and analyze. 

BEA also conducts several in-depth analyses of the data. As a result, the vast amount of data gathered is misunderstood and underutilized by users who could benefit from more information on changes in US direct investment abroad. 

In effect, neither the general public nor professionals are aware of the data that BEA collects and publishes on direct investment.

Reporting rules are not being followed as closely as they should be. Overseas parent firms' US affiliates frequently fail to react or respond incompletely and frequently refer inquiries to their foreign parent companies. 

Late reporting is another issue. Increased funds for the BEA to track new inbound investments and prosecute cases of noncompliance and poor reporting, as well as increased penalties and enforcement operations, should help to improve the situation. 

It is suspected that most foreign investment in US real estate is not accounted for in the US balance of payments.

The statistics on income from (payments to) foreign direct investment in the United States are insufficient. 

While foreign direct investment increased by $342 billion (from $124 billion to $466 billion at current prices) between 1980 and 1990, income payments attributable to it did not. They ranged between $3 billion and S11 billion over that time. 

In 1990, it was reported that such payouts totaled less than $2 billion. These income payments follow a different pattern than money received from US direct investment abroad.

Between 1980 and 1990, US direct investment abroad increased by only $213 billion, from $385 billion to $598 billion (at current prices). During the same period, however, income from such investments increased from $37 billion to nearly $55 billion. 

Although differences in income from foreign direct investment in the United States and income from foreign direct investment abroad can be explained by: 

  1. Differences in cyclical conditions in the United States and abroad, as well as changes in foreign exchange rates, and

  2. The vast disparities in magnitude and trend.

These drastic differences raise questions about the underlying causes of the relatively small income payments on foreign direct investment in the United States. Filers who purposefully understate their incomes risk losing tax money for the Department of Treasury.


1. Because the current system for collecting data on international portfolio transactions was created before the advent of modern electronic and telecommunications technology, more research is needed to investigate alternative data collection methods. 

Alternative sources of information, such as securities clearing systems, payments systems for banking transactions, and other clearing channels for non-banking transactions, should be investigated in the long run. 

Increased automation in trading and settlement systems would make data collection from these sources easier.

2. It is necessary to research to create methods for expanding coverage and enforcing filers' compliance with reporting requirements. 

Improvements in coverage of US external investment in foreign securities and transactions by non-financial entities are particularly important for securities transactions. 

In terms of bank reporting, the primary focus of the study should be on improving the timely and correct reporting of foreign bank affiliates in the United States. 

Improvements in the coverage of activities of the non-financial population in the United States, both corporate and personal, are required for transactions on non-banking concerns. 

It is also worth considering expanding the submission of TIC C forms, potentially by lowering the reporting exemption limits.

3. More work is needed to fully realize the analytic potential of existing data on the US inward and outward direct investment and efficiently communicate information to consumers. 

Existing data should be examined to see if any additions, deletions, or changes are required. To improve the analytic utility of data, research should be performed to see how it might be better synthesized and tabulated in more readable formats.

4. Given the challenges of getting data on residents' direct purchases or sales of foreign securities, a study into the potential of exchanging data with partner nations should be performed. 

This would necessitate the creation of universal codes for identifying securities and standardized reporting criteria, as well as common definitions of the immediate transactor's and ultimate owner's residences.

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Researched and Authored by Sara Malwiya  | LinkedIn

Reviewed and Edited by Aditya Salunke I LinkedIn

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