FDI which has directly flowed into the real economy contributes to capital accumulation, technological innovation and industrial upgrading without problems of term mismatch between short term loans and long term investments or mismatch between domestic and foreign currencies. FDI also offers benefits such as advanced technologies, managerial experience and foreign markets.

Therefore, without consideration of national defense security or nationalism, the advantages of FDI in opening a capital account outweigh its disadvantages. Singapore's success is an example of this. China has become the top destination of FDI since its reform and opening up and subsequently FDI plays an important role in China's rapid economic growth.

Allowing domestic financial institutions or enterprises to borrow internationally and invest the money domestically in line with comparative advantages would seem to be beneficial to the real economy. Nonetheless, when profits fall due to fluctuations, it may become difficult to keep up with interest payments.

South Korea faced this challenge during the East Asian financial crisis of 1997 and almost suffered it again when the 2008 global financial crisis hit. It avoided this problem in the end by signing a currency swap agreement with the United States.

Furthermore, it is hard for a country to ensure that its banks or enterprises will invest foreign loans in domestic industries with comparative advantages. They may invest in "catch-up" industries, the speculative property market, the stock market, or even in expanding consumer credit. If domestic productivity or exports are not competitive enough, term mismatch, currency mismatch or other problems will arise when the time comes to pay back the debt. Thailand during the Asian financial crisis and the economies in southern and eastern Europe during the 2008 global financial crisis are classic examples.

Although allowing banks and enterprises to borrow abroad would boost domestic investment and consumption in the short term, such actions often cause a financial crisis. Therefore, the disadvantages outweigh the advantages.

Short term capital usually flows into the real estate and stock markets instead of the real economy. It contributes little to increasing productivity and instead can produce bubbles.

If the amount of capital inflow increases, this will entail a real exchange rate appreciation which can be realized in two ways. With the free-floating exchange rate, the rise of a nominal exchange rate can lead to a rise of real exchange rate. In return, any appreciation of the real exchange rate will weaken one's competitiveness in terms of export and slow down economic growth. Meanwhile, the speculative short term capital inflow in stock and property markets is bound to outflow and induce a false sense of prosperity.

Opening capital account increases economic volatility

The U.S. dollar was once the only gold-pegged currency in the world, with other nations having to reserve dollars when issuing currencies before. Yet ever since the collapse of Bretton Woods System in 1971, the U.S. Federal Reserve has implemented inflation-oriented policies. These policies include that when capital outflow occurs, the currency does not peg against the gold. The Federal Reserve then can increase the quantity of money to maintain economic stability and as a result, the U.S. was able to ease its control over money capital outflow.

Wall Street bankers became the most active advocators of capital account opening in return for a fat arbitrage profit on the international market, even pushing forward financial liberation in developed countries. In 2007, the profit gained by Wall Street investment banks and financial institutions accounted for some 40 percent of the total U.S. economic profits.

Some American scholars advocate for opening a capital account in developing economies as their theories do not differentiate between financial and real capital. Currency or term mismatches do not occur in their theory; neither does the exchange between virtual capital from the reserve currency issuing country and the real goods and services from other countries. There are no industrial structure differences or technological gaps between developing and developed countries. In short, according to their theoretical model, opening a capital account seems to be the perfect solution to the capital shortage in developing countries. And as a result, those Wall Street banks and international financial institutions are walking tall on asking developing countries to open their capital accounts.