Global finance 429 these barriers have been and are still being reduced,there are a number of reasons why international investment is by no means yet a seamless web.First, movement of capital across borders still involves country and currency risks. Investors must take into account the possibility that assets in one country may be riskier than those in another country and that movements in exchange rates may affect the return on their investments.Of course,both of these problems are addressed by adjustments to asset prices and returns and by forward markets,but they imply that capital movements among industrialized countries are more difficult than capital movements within them. Second,while some forms of capital do move quite easily across borders, others remain more geographically specific.Most assertions of full interna- tional capital mobility refer to international transfers of financial assets, especially bonds and bank claims.Equity markets appear to be far less integrated,and other forms of capital still less so.In most interpretations,this is because many forms of capital,such as technological and managerial knowledge,skills,and networks,are specific to their current use and cannot easily be transferred from place to place."Although detailed analyses do not exist,most observers would probably agree that financial capital is most mobile across borders,followed by equities and then by firm-or sector-specific capital assets.12 The greater international mobility of financial assets,the more modest international mobility of other assets,and the continued importance of unexpected exchange rate movements must all be taken into account in assessments of national policy autonomy in the contemporary international economy.The appraisal can be divided into policy targeted at well-defined segments of the economy (industries,sectors,and regions)and policy of macroeconomic import.The baseline is the assertion that asset markets are 9.The most careful assessment of the Feldstein-Horioka findings,updated through the late 1980s,emphasizes the great increase in capital mobility and the continued importance of currency premiums.See Jeffrey A.Frankel,"Quantifying International Capital Mobility in the 1980s,"in Douglas Bernheim and John Shoven,eds.,National Saving and Economic Performance(Chicago: University of Chicago Press,1991),pp.227-60. 10.For rough evidence on intranational and international stock price differentials,see Barry Eichengreen,"Is Europe an Optimum Currency Area?"mimeograph,University of California at Berkeley,1990,pp.6-9.The differentials may have to do with nontransferable advantages accruing to national owners,such as greater access to information or to monitoring and enforcement mechanisms 11.The modern theory of foreign direct investment is based on the proposition that multinational firms exist precisely because they facilitate (but do not make costless)the international transmission of such specific assets.The classic statement by Caves is still probably the most appropriate here.See Richard E.Caves,"International Corporations:The Industrial Economics of Foreign Investment,"Economica 38(February 1971),pp.1-27. 12.This is a conclusion made by Frankel in"Quantifying International Capital Mobility in the 1980s."One indication of the high degree to which markets for financial assets are integrated is the virtual disappearance of significant spreads between domestic and offshore interest rates in most currency instruments of members of the Organization for Economic Cooperation and Develop- ment (OECD).Regarding this subject,see Goldstein,Mathieson,and Lane,"Determinants and Systemic Consequences of International Capital Flows,"pp.7-11.Global finance 429 these barriers have been and are still being reduced, there are a number of reasons why international investment is by no means yet a seamless web. First, movement of capital across borders still involves country and currency risks. Investors must take into account the possibility that assets in one country may be riskier than those in another country and that movements in exchange rates may affect the return on their investments. Of course, both of these problems are addressed by adjustments to asset prices and returns and by forward markets, but they imply that capital movements among industrialized countries are more difficult than capital movements within them.' Second, while some firms of capital do move quite easily across borders, others remain more geographically specific. Most assertions of full interna￾tional capital mobility refer to international transfers of financial assets, especially bonds and bank claims. Equity markets appear to be far less integrated,'' and other forms of capital still less so. In most interpretations, this is because many forms of capital, such as technological and managerial knowledge, skills, and networks, are specific to their current use and cannot easily be transferred from place to place." Although detailed analyses do not exist, most observers would probably agree that financial capital is most mobile across borders, followed by equities and then by firm- or sector-specific capital assets.'' The greater international mobility of financial assets, the more modest international mobility of other assets, and the continued importance of unexpected exchange rate movements must all be taken into account in assessments of national policy autonomy in the contemporary international economy. The appraisal can be divided into policy targeted at well-defined segments of the economy (industries, sectors, and regions) and policy of macroeconomic import. The baseline is the assertion that asset markets are 9. The most careful assessment of the Feldstein-Horioka findings, updated through the late 1980s, emphasizes the great increase in capital mobility and the continued importance of currency premiums. See Jeffrey A. Frankel, "Quantifying International Capital Mobility in the 1980s," in Douglas Bernheim and John Shoven, eds., National Saving and Economic Performance (Chicago: University of Chicago Press, 1991), pp. 227-60. 10. For rough evidence on intranational and international stock price differentials, see Barry Eichengreen, "Is Europe an Optimum Currency Area?" mimeograph, University of California at Berkeley, 1990, pp. 69. The differentials may have to do with nontransferable advantages accruing to national owners, such as greater access to information or to monitoring and enforcement mechanisms. 11. The modern theory of foreign direct investment is based on the proposition that multinational firms exist precisely because they facilitate (but do not make costless) the international transmission of such specific assets. The classic statement by Caves is still probably the most appropriate here. See Richard E. Caves, "International Corporations: The Industrial Economics of Foreign Investment," Economica 38 (February 1971), pp. 1-27. 12. This is a conclusion made by Frankel in "Quantifying International Capital Mobility in the 1980s." One indication of the high degree to which markets for financial assets are integrated is the virtual disappearance of significant spreads between domestic and offshore interest rates in most currency instruments of members of the Organization for Economic Cooperation and Develop￾ment (OECD). Regarding this subject, see Goldstein, Mathieson, and Lane, "Determinants and Systemic Consequences of International Capital Flows," pp. 7-11