Foreign Portfolio Investment in Emerging Equity Markets

It is increasingly appreciated that improved markets for investment in equities can help promote faster economic growth. Such improvement also allows the ordinary saver to share in that growth. The past decade has seen quite extraordinary expansion in equity markets in a whole range of countries and cross border investment has expanded even faster than investment in domestic equities. One important purpose of this report is to address the question as to whether developing countries can expect to attract net flows of private portfolio capital in any significant amount to their emerging equity markets. The answer of this report is clearly affirmative. As part of the rapid development of a global securities industry, a wide range of developing countries including low income and highly indebted countries can expect to be able to attract a portion of the flows invested in foreign markets by investors from the world's major financial centres. But to do this successfully, each country will have to compete for investor attention with other markets; that is, address a critical shortage of suitable stock, reduce obstacles to access and take actions to support the development of their markets; development which is in any event required for sound domestic reasons. The report focuses on these questions and makes a number of recommendations to the developing countries themselves and to the international community. The issues which developing countries have to address in fostering the growth of their capital markets and in creating conditions attractive for foreign investors as well as for domestic investors are by no means unique to developing countries. On the contrary, many of the issues apply to varying degrees to the markets in developed countries. The difficult and long standing nature of some of the problems is apparent from the fact that developed countries continue to grapple with them — not necessarily always with success.