Impact of Foreign Investment on the Volatility and Growth of Emerging Stock Markets

By Khambata, Dara | Multinational Business Review, Spring 2000 | Go to article overview
Save to active project

Impact of Foreign Investment on the Volatility and Growth of Emerging Stock Markets


Khambata, Dara, Multinational Business Review


Since 1979 many LDC's have re-examined the interventionist development paradigm that had dominated their economies for many years and introduced economic reforms including financial sector reform and the creation of efficient equity markets. Although it is the widespread impression that influxes of foreign capital led to increased volatility in these emerging markets, short- and long-term tests indicate little evidence to support claims of increased volatility in these already volatile markets. The experiences of the recent crisis have shown that, despite initial improvements in regulatory and supervisory controls, a weak financial system combined with an open capital account is an accident waiting to happen.

HISTORICAL OVERVIEW OF EMERGING-STOCK MARKETS

The second oil price shock of 1979 and the ensuing global recession put an end to three decades of above-average growth in the developing countries and forced many LDC's to acknowledge the damage that had been caused by thirty years of interventionist policies. Development programs based on subsidies, protectionism, and over-investment had crippled the public and private sectors of these nations, plaguing them with inefficiency and burdening them with colossal amounts of debt. Facing inefficiency in their own countries and reluctant creditors abroad, these LDC's were compelled to re-examine the interventionist development paradigm that had dominated their economies for many years. This re-examination culminated in economic reform for a large number of developing countries. By 1990, most LDC's had implemented structural reforms including: fiscal deficit reduction, inflation control, currency stabilization, trade liberalization, privatization, and various other measures to stimulate growth of a dynamic and competitive private sector, including financial sector reform.

The creation of efficient equity markets in these LDCs was quickly identified as an important objective of financial market reform, because funds raised in these markets would enable firms in the private sector to decrease their overreliance on debt finance, thus increasing their overall efficiency, competitiveness, and solvency. Since the mid-1980s, stock market activity has increased substantially in many developing countries. International interest in emerging stock markets has generally followed several stages. In the 1980s the four Asian "tigers" (Hong Kong, Korea, Singapore, and Taiwan) attracted much attention because of their rapid economic growth rates. The expected entry of Greece and Portugal into the European Common Market led to a financial boom in those countries in the mid-1980s. Latin American countries regained international interest when Brady plans brought a solution to the rescheduling of their nonperforming debts, and their stock markets offered attractive returns in the early 1990s. The disintegration of communism led to the development of market economies in Eastern Europe and the hope for attractive investment opportunities for investors, including foreign investors.

Traditionally, investors have considered only developed markets in their international diversification strategies. These are markets that have been in operation for a long time and whose economies are already in a developed stage. In the past two decades, however, investors have come to appreciate the stock market development and economic growth potential of many emerging countries. The World Bank, which was substantially involved in assisting these developing countries, decided to promote their stock markets. The International Finance Corporation (IFC), a member of the World Bank Group, began to publish monthly Emerging Stock Market Indexes that allowed money managers to measure the performance of their portfolios invested in developing countries.

In the first half of the 1990s, several developing countries successfully attracted large external private inflows. These flows, compared with other episodes of large private capital flows to developing countries over the last 20 years, were dominated by portfolio flows rather than by bank financing and were part of a broader process of internationalization and integration of capital markets.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Impact of Foreign Investment on the Volatility and Growth of Emerging Stock Markets
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?