The Emergence of Equity Investment in Developing Countries: Overview

Abstract

Equity flows to developing countries have increased sharply in recent years. Foreign equity investment can be beneficial to developing countries because of its risk-sharing characteristics and effects on resource mobilization and allocation. Empirical evidence shows that the stock markets of developing countries have become more, although not fully, integrated with world financial markets, and this increased integration implies a lower risk-adjusted cost of capital. Constraints to further increasing the flows and expanding the benefits are macroinstability, poorly functioning stock markets, and insufficiently open financial markets. Empirical evidence does not support the view that equity flows are more volatile than other types of capital flows or that equity flows have a negative impact on the volatility of stock prices.

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