What is Capital Flight?

Capital flight has to do with the movement of money away from domestic investments and bank accounts, and toward accounts and investment opportunities in other countries. Capital flight usually occurs for two different reasons, and may be a temporary strategy or a long-term approach to managing assets.

One of the more common reasons for capital flight is the change of economic conditions within a country. When an economic trend appears to be settling in and making long term shifts that the investor does not consider desirable, he or she may choose to consider moving assets into a more stable investing environment. This strategy of money movement will ensure that the overall value of the investment portfolio at least has a good chance of maintaining the current worth, as well as possibly appreciating over time.

Another reason for capital flight is a desire to diversify the type of investments that make up the financial portfolio. An investor may choose to divert resources that were previously utilized in domestic investments to take advantage of what appears to be a high yield opportunity that is based in another country. In this scenario, the decision to move funds out of the domestic market has nothing to do with forecasting any economic issues with the market in the country of residence. Rather, this type of capital flight is considered a temporary phenomenon. Once the international investment has yielded a return and begun to level off, the investor is very likely to sell his or her shares and return those funds to domestic investments.

Long term capital flight is almost always due to the emergence of factors that shake the confidence of the investor in the domestic economy. Inflation is one example of economic conditions that may result in investors choosing to implement capital flight. When economic conditions are projected to remain unfavorable for an extended period of time, the investor is much more likely to lose interest in ever moving away from international investments and back to domestic investments. However, in short term capital flight, the investor chooses to divert resources back into the country once the financial crisis has passed.