What is Capital Flight?
Capital flight is the movement of capital from one country to another, or sometimes from one investment sector to another, to capitalize on returns or mitigate risk.
How Does Capital Flight Work?
Let's say the Venezuelan government is overthrown. The new government begins nationalizing many industries and even begins seizing assets from oil companies, banks and some manufacturers.
Because the investors in these companies are essentially having their property stolen, the region becomes an undesirable place to put money. Accordingly, there is a big sell-off in Venezuelan stocks as investors pull their money out of the country and reinvest it in other countries.
Why Does Capital Flight Matter?
Capital flight can devastate markets that suddenly look undesirable, though this event can benefit other markets as investors look for better places to put their money. The concept weighs heavily on the minds of developing economies that are trying to attract investment yet may be experiencing political instability or financial crises.