Surveys of Theory, Evidence and Policy
Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde
Chapter 7: Policy Issues in Market-Based and Non-Market-Based Measures to Control the Volatility of Portfolio Investment
7. Policy issues in market-based and nonmarket-based measures to control the volatility of portfolio investment Edmund Valpy Knox FitzGerald 1. 1.1 INTRODUCTION The Increasing Importance of Portfolio Investment The increasing globalization of capital markets is widely regarded as a unique opportunity for poor economies to accelerate their rate of growth by gaining access to ﬁnancial resources. Higher rates of private ﬁxed capital formation are expected to result from ﬁnancial liberalization, reducing poverty by generating new jobs at good wages and providing ﬁscal resources for human development (World Bank, 1997). There are three main categories of private foreign investment ﬂows: foreign direct investment (FDI) which involves investment within a ﬁrm where the foreign investor has a permanent interest in the subsidiary; foreign portfolio investment (FPI); and foreign bank lending (FBL) to banks, ﬁrms and governments in the recipient country. Foreign portfolio investment is effected by purchases of bonds and equities issued by companies and governments, on both international and domestic capital markets. Large domestic corporations in developing countries are increasingly issuing international depository receipts or gaining listings on major stock markets, while foreign investors increasingly purchase bonds (particularly government paper) issued on domestic markets. As Table 7.1 indicates, FPI has accounted for about one-half of net private capital ﬂows to ‘emerging markets’ (that is, developing and transition countries) during the 1990s. The rapid growth of portfolio investment, in terms of capital ﬂows across frontiers, is primarily due to the securitization of capital ﬂows and the institutionalization of savings in industrial countries...
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