The Emergence of Equity Investment in Developing Countries: Overview |
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Authors: | Claessens Stijn |
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Affiliation: | Stijn Claessens is with the Technical Department of the Europe and Central Asia and Middle East and North Africa Regions at the World Bank. He thanks Geert Bekaert, Elaine Buckberg, Aslf Demirgç-Kunt, Campbell Harvey, Leonardo Hernandez, and Andrew Warner for useful comments. The article draws partly on joint work with Sudarshan Gooptu. Part of this research was funded by World Bank research grants RPO 678-01 and 679-94. |
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Abstract: | Equity flows to developing countries have increased sharplyin recent years. Foreign equity investment can be beneficialto developing countries because of its risk-sharing characteristicsand effects on resource mobilization and allocation. Empiricalevidence shows that the stock markets of developing countrieshave become more, although not fully, integrated with worldfinancial markets, and this increased integration implies alower risk-adjusted cost of capital. Constraints to furtherincreasing the flows and expanding the benefits are macroinstability,poorly functioning stock markets, and insufficiently open financialmarkets. Empirical evidence does not support the view that equityflows are more volatile than other types of capital flows orthat equity flows have a negative impact on the volatility ofstock prices. |
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