A common phrase that we hear is this: "capital flight." It is misleading.
To understand capital flight, watch the 1982 Disney movie, Night Crossing. It is the story of an East German family that escaped East Germany by building a hot air balloon and floating over the Berlin wall. The talents of that family were lost to Communist East Germany.
The Berlin wall was built in order to reduce capital flight. But nobody flew. They walked or drove. They flew only after the wall was built.
Anything that is not comparable to that balloon flight over a government-sealed border is not capital flight.
FIXED CAPITAL
This is obvious with fixed capital, such as real estate. Unless you buy a factory, disassemble it, ship it piece by piece on a ship or a train to another country, and reassemble it, there is no capital "flight."
Say that you own a factory. The local government, or even the national government, passes a law against some form of polluting. Your factory is a target of this legislation. You have these choices:
1. Install pollution control devices at a cost.
2. Pay the fines.
3. Switch production to something else that is less profitable.
4. Tear it down and build condos.
5. Sell it to someone who has a better use for it.
If you select #5, and the person buying it lives outside the country, this is called capital flight. It isn't capital flight. It is selling something to a foreigner at a loss.
What is true of a factory is equally true of a share of stock. If there is pressure to sell stocks in a national market, and most of the buyers live across the national border, this is called capital flight. It isn't capital flight. It is selling to foreigners at a loss.
Ownership changes. Capital remains the same. The price of this capital changes. Capital remains the same.
What about money? The person who wants to buys shares of stock in a foreign stock market must first sell his nation's currency and buy the other nation's currency. Then he can buy shares.
His purchase of the other nation's currency tends to raise the price of that currency unit in comparison to the currency of his nation's currency. Is this capital flight out of his nation's currency? No. His nation's currency stays in his nation's banking system, always under the watchful eyes of his nation's central bankers. The money supply on each side of the border does not change as a result of decisions to buy and sell ownership of currencies. The exchange rate may change, meaning comparative value. But the money on both sides stays put.
The exception: when paper money issued by Nation A is sent by mail to relatives in Nation M, there is capital flight. Maybe a plane carries this money: true flight. Fifty years ago, a truck carried it. But we did not call this "capital trucking." It was called capital flight.
Capital rarely moves. It rarely takes flight. Ownership changes. Exchange ratios -- prices -- change. Ownership risks and uncertainties are transferred from one person or corporation or hedge fund to another. But capital stays put.
Capital rarely flies. Confidence in capital flies high or else flies away. But capital stays put.
CONCLUSION
Hardly anyone in the financial world will stop using the phrase "capital flight." But whenever you hear it, think "hot air balloon." This will help keep you analytically grounded.
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