Wither Capital Market Development - Annotated Bibliography Example

Summary of the Central Topics Article A lot of debate has taken place among economists regarding the future of the capital markets in the different emerging economies of the world. The article “Wither Capital Market Development?” provides a special insight into the capital markets of the Latin American countries. A huge amount of effort had been made to promote the capital markets in these countries. However, most of the countries have portrayed disheartening results in the path of progress. The article has analysed the various issues that may arise due to the rise of the capital markets of the Latin American countries. In the times of globalisation, the capital markets of one country are influenced by the international economy. Most of the investors and the companies are either opening up operations in the countries outside their home countries or have taken other strategies of internationalisation. According to the article, globalisation has resulted in the internationalisation of the capital markets. Most of the local capital markets are deserted from that of the foreign market which may be one of the major reasons for the hindrance of the activities of the markets at the international scenario. A huge number of investments are coming in form of the foreign institutional investments in the Latin American countries. This is an indication of the fact that the countries are now influenced by globalisation to a large extent. The article looks at reasons why the developments in the financial market are so important for an economy. The modes of development are the improvement in the way the companies carry out their methods of corporate governance. A section of the article also looks at the various stages through which the channel of the foreign institutional investment takes place in an economy. The international capital markets have been reviewed especially in the times of the great depression. The major exchanges like Tokyo, London, Frankfurt and New York has been taken into consideration and their evolution and significance in the other emerging economies have been thoroughly analysed. The articles investigate into the developments that have taken place in the local stock markets over a period of the last one decade. The background for the analysis being set the authors has tried to find the specific reasons that have contributed to the development of the capital markets in the global framework. The analysis has been supplemented with suitable policy recommendations which show that there are a number of negative aspects of the capital markets of Latin America. Question 1: How has globalisation influenced the Latin American countries and what are the consequences? Question 2: How far the Latin American countries would be able to overcome the problems that act as a bar to the development of the capital markets? Article 2 In the article “The Investment Climate in Latin America”, the authors have tried to provide an analysis of the microeconomic data relating to various economic variables of the Latin American countries. This in turn forms the basis of the relationship between the investment avenues in the countries and the growth rate of the Latin American economies. The authors have tried to point out the various indicators that provide an idea about the success of a business. The first part of the text analyses the data of the 10,000 firms which help in the understanding of the investment climate of the countries at the very basic level. The sample had been collected from 16 of the Latin American countries. These include the factors like how the organisations are run in the Latin American countries or the level of stringency of the rules and regulations in the country in the context of conduct of a business. The data that has been analysed for a number of firms in the countries shows the areas of discrepancy and conformity with the hypothesis that has been formed by the authors in the article. The size of the business, country of operation as well as the industry in which it operated determine how these firms can be considered as the right place for investment or the future growth prospects of these organisations can be comprehended. It has been found that in most of the countries there are a number of reasons like the level of corruption, the regulations, the macroeconomic instability, the high rates of taxes, the poor level of education and lack of electricity are some of the reasons that the countries consider to be hindrance for these countries in the path of growth and development. The entire analysis has been undertaken by the authors using the appropriate econometric methods. The results show that rule of law acts as a major reason for the countries to grow at such huge levels. Among the reasons which curb the pace of growth are the levels of corruption, the rate of crime in the countries and the expense that the agents of the economies have to incur for the preventive securities. The companies that operate in those countries that have a well defined regulatory framework are found to be most successful in the terms of the productivity of labour as well as the industrial output. Along with this another fact that has come up in the matter is that in those economies which have very stringent regulatory framework, there are very high rates of tax evasion. The firs which comply with the auditing norms and the other corporate regulations are generally found to have very sound system for the protection of the investors. These firms are found to be very good investment opportunity for the organisations. However some of the economists have challenges the view stating that the firms that have been chosen have only been considered as per the whims of the researcher and therefore there is a scope for bias in the entire process of analysis. However the most important point that comes up in the article is that in a particular economy the investment climate would be conducive for the economy only when all the sectors both private and the public sector work in tandem with one another. Question 1: What are the other factors that have passively acted as a yardstick to the growth of the sector? Question 2: How far does the regulatory framework of the countries help in the path of productivity and growth? Article 3 The article by Naylor and Boardman about real options in the context of foreign investment is an empirical analysis of the case of South America. The past few years have shown a steady increase in the foreign investments in most of the developing countries. These investment made in the lands across the international borders have been exposed to a lot of risks. The investments in the form of FDI act as channels of long term investment for the investors and hence the when the investors consider the various options that are available for them in the context of the real options. Most of the organisations at the present day focus on the various strategies pertaining to internationalisation and therefore they take measures to enhance the corporate skills that they possess. If the businesses are able to conduct the right assessment of the projects that they might undertake in the foreign lands it would lead to sound decisions relating to capital budgeting. This would provide them with an advantage as compared to the competitors and hence it is essential for the companies to look out for the right projects or the sectors where investments can be made. The project appraisal of investment considering the real options is considered to be one of the sound techniques that are applied in case of the most practical analyses. The reason behind this is that in case of the foreign companies the kind of risk exposures and the situations faced would be different from that of the domestic projects. The article has not only considered the theoretical aspects but has also probed into the case of a company of South America in 1997. The approaches like the adjusted present value and the net present value of the cash flows coming out of the project has been calculated with the support of the appropriate numerical data. The risk adjusted NPV has been calculated for the foreign exchange risks that the company was exposed to at the time of undertaking the project out of foreign capital. In conducting the research both the equity and the cash flow streams have been calculated. The article considers pros and cons of all the approaches that have been taken into consideration (Luehrman 89-99). It has been found from the prior research done on this context that there are various kinds of relations of risk and return for the FDI. In the present day a number of advanced techniques are being used for the calculation of the cash flows from the FDI. There is also a very ardent need for considering the different types of contingent situations for the projects. Along with this the environmental and social issues have also drawn attention of the economists. Thus there is a real need for appraisals at regular intervals of time and a holistic approach needs to be taken in this regard to estimate the fair value of the projects and the risks that they are exposed to. Question 1: How far the investment appraisal methods are successful in determining the true value of the foreign projects? Question 2: How far do these methods reflect the risks that are associated with a project? Article 4 The article delves into one of the most surprising feature of the FDI and makes an investigation into the cases of Foreign Direct Investment that has taken in the financial sector of an economy. The first part of the article makes a literature review to take a look at the past researches done by the practitioners on this particular topic. Most of the economists are of the opinion that the foreign direct investments contribute positively to an economy by fillip of the gap of knowhow or technology through the medium of the multinational organisations. The developing economies generally act as the host countries for the FDI mainly that mainly come from the advanced economies in the form of advanced technology of production. In case of the financial institutions like the banks foreign direct investment increase the level of efficiency with which the banking operations are undertaken. There is a huge amount of discrepancy in the efficiency with which a foreign invested bank and a domestic bank operates. In case of the financial institutions like banks the interest income and the operating expenditure of the bank are the parameters through which the efficiency of the banks is estimated. However it has always remained a question for the economist regarding benefits of the local workers due to the arrival of the FDI in terms of their wages. It has been found that in countries like Mexico due to the inflow of foreign direct investment the average rate of wages of the labours in the economy has also increased. Thus the employees who are involved in the manufacturing sector are the ones who derive the benefit out of the FDI inflow in a particular economy. According to the authors the banking sector of the emerging economies has a very significant role in the FDI because the employment in the financial sector would be much higher. The benefits that this sector would get out of FDI would be much higher than that of the industrial sector of the economy. FDI in this sector would encourage the investment and hence the rate of saving in the economy would be on the rise. Thus the capital from the savers would be properly channelized to the investment avenues in the country. The patterns of lending in the banks are a testimony of the fact that there would be an upward trend in the growth pattern of the economy due to the FDI inflow. However, there are several consequences of FDI in the host country. The business cycles that the host country would originally have may be changed due to the influence of the business cycles of the foreign country. FDI in the financial sector also ensures that the host country is able to retain the financial stability of the economy. The entry of the foreign bank in the host country would also create an atmosphere of healthy competition in the economy and thus it will generate an atmosphere of better compliance with the local rules and regulations by the domestic banks. The nations which are to a large extent have political influence would formulate long term policies for their short term benefits, which may help the economies to grow financially in the long run and may help in making the financial framework of the economy stable. Question 1: How much the FDI in the financial sector especially in the banking sector has proved to be a hit? Question 2: What are the areas where the financial sector lag behind the manufacturing sector FDI? Works cited Luehrman, Tim. A. “Strategy as a Portfolio of Real Options.” Harvard Business Review, 76.5 (1998): 89-99. Print. Read More