Capital flows are the movement of funds for the purposes of investment, commercial business, or production. A corporate will move capital from one region to another for production purposes to achieve the most efficient business scenario based on the least expensive and most efficient labor.
Capital flows for investment purposes are international. Investors are constantly looking for the most robust returns and are will to move capital into regions which are experiencing strong growth and asset inflation. Strong equity market performance within a country will attract capital flows. For investors who live outside that sovereign they will need to convert their home currency to the currency of the equity market that is attractive to make an investment.
High levels of interest rates will also attract investors. As previously stated, investor who are looking to purchase fixed income products with high yields will move capital to specific sovereign nations with high interest rates.
Capital flows reflect the strength or weakness of capital markets and in many cases the strength of an economy. Investors also look at the growth rate of certain capital flows, targeting capital spending, and business investment to find any trends that would point to expansion or contraction.