Now days it is a matter of concern that whether the issue of global imbalances will solve or not. Some researchers have a view that this system of global imbalance will not continue because US will definitely stabilize its external debt ratios and the adjustments will be made too. Amongst one of these adjustments, there will be downfall of dollar whereas some people claim that this system will continue for some specific period of time. This is due to some factors that create value for U.S. assets and make them more attractive.
A question often arises why do foreigners invest in the United States? Kristin Forbes says that if we look a few years back, we come to know that the people have received low returns on their particular US investment in past few years as compared to other foreign investment. This return difference exists even in the individual assets. But in spite of all this, the people may continue to invest in U.S. for a number of reasons. They can prefer to buy different United States portfolio investments so that they could get benefits from the highly developed and effective markets and from the sound governance of the US. However these two strengths have shown some weaknesses in the recent financial crunch. Should the risk be expanded, they prefer it especially when the returns in United States markets have any connection with the returns of their own country’s local financial markets. They can also prefer investment in US due to some other factors like strong connections with United States, sharing a general language, inexpensive communication etc.
Forbes asks that what you think is the key factor for deciding the foreign investment in US. She has a view that the country’s financial development is a key factor that has a profound effect on the investment in U.S. equity and the debt markets and she has a strong belief that the return differences are quite evident in forecasting the investment in U.S. equity and the foreigners prefer to invest in US equity when the returns on equity are offered in their own local markets, are less than the US returns.
Forbes noticed these results carefully and cleared that the role of financial development is primary in deciding the U.S. investment and it has 3 significant implications. First of all, the actual results strongly defend the theoretical literature on the issue of global imbalances. Secondly, it is a time when the different countries are trying to make their financial markets very strong so this phenomenon will slowly reduce the significant driver of the capital flows into US. Thirdly; it is evident that the strong financial markets and institutions are the thrust behind the tremendous U.S capital flows. So anything that will affect the U.S. equity and different bond markets, it will definitely create the atmosphere of risk for the United States capital inflows. If it happens that the less progressed financial markets get start to question the comparative benefit of US markets, this situation will lead towards more rapid settlement of asset prices, capital inflows and the global imbalances.