A Survey of the literature on the determinants of foreign portfolio investments in the United States

Conclusions

In the last several years we have seen a substantial theoretical advancement in our understanding of the factors determining international portfolio capital movements. From the mechanistic flow theory we have progressed to the portfolio-adjustment theory which rests on a firmer microeconomic foundation. However, because of the multifarious functions of the United States in the world economy the portfolio-adjustment theory is not quite adequate in explaining the foreign portfolio investments in the United States. There are other motives such as maintaining working balances and compensatory balances in addition to the expected utility maximization. In some studies ad hoc assumptions are introduced to account for these motives tor holding U.S. liabilities. Albeit some statistically successful results there is much to be desired in this simple portfolio approach modified withad hoc assumptions.

Despite the theoretical weakness we might have seen more empirical research in this area if data on wealth for foreign countries were available. Furthermore, the few existing studies were carried out by doing away with the wealth variable without any convincing justification. Given the constraint of data a more persuasive argument will have to be presented in favor of deleting the wealth variable or using an alternative variable. It seems that a proper use of estimates of permanent income, which can be approximated empirically, may be successful in empirical estimations of capital flows.