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Why International Equity Inflows to Emerging Markets are Inefficient and Small Relative to International Debt Flows

Author

Listed:
  • Assaf Razin
  • Efraim Sadka
  • Chi-Wa Yuen

Abstract

This paper considers the financing of investment in the presence of asymmetric information between the 'insiders' and the 'outsiders' of the firms in a small open economy. It establishes a well-defined capital structure for the economy as a whole with the following features: low-productivity firms rely on the equity market to finance investment at a relatively low level; medium-productivity firms do not invest at all; and high-productivity firms rely on the debt market to finance investment at a relatively high level. It is shown that the debt market is efficient, with respect to both its scope and the amount of investment that each firm makes. However, the equity market fails: its scope is too narrow and the investment each firm makes is too little. A corrective policy requires just one instrument which is rather unconventional: lump-sum subsidies to those firms that choose to equity-finance their investment (i.e., equity-market-contingent grants).

Suggested Citation

  • Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 2001. "Why International Equity Inflows to Emerging Markets are Inefficient and Small Relative to International Debt Flows," NBER Working Papers 8659, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8659
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    References listed on IDEAS

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    9. Razin, Assaf & Sadka, Efraim & Yuen, Chi-WA, 1997. "Channelling Domestic Savings Into Productive Investment Under Asymmetric Information: The Essential Role of Foreign Direct Investment," Foerder Institute for Economic Research Working Papers 275630, Tel-Aviv University > Foerder Institute for Economic Research.
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    Citations

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    Cited by:

    1. Loof, Hans, 2004. "Dynamic optimal capital structure and technical change," Structural Change and Economic Dynamics, Elsevier, vol. 15(4), pages 449-468, December.
    2. Jeffrey A. Frankel & Shang-Jin Wei, 2004. "Managing Macroeconomic Crises," NBER Working Papers 10907, National Bureau of Economic Research, Inc.
    3. Alimov, Behzod, 2022. "The dynamic effects of debt and equity inflows: Evidence from emerging and developing countries," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).
    4. Bélyácz, Iván & Kuti, Mónika, 2009. "Külföldi működőtőke és külső eladósodás. Kísérlet a makrogazdasági tőkestruktúra új szempontú vizsgálatára [Foreign operating capital and foreign indebtedness. An attempt to examine macroeconomic capital structure from a new angle]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 133-154.
    5. Lööf, Hans, 2003. "Dynamic Optimal Capital Structure and Technological Change," ZEW Discussion Papers 03-06, ZEW - Leibniz Centre for European Economic Research.
    6. Dell'Erba, Salvatore & Reinhardt, Dennis, 2015. "FDI, debt and capital controls," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 29-50.

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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F35 - International Economics - - International Finance - - - Foreign Aid

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