Finance and Development

Finance and Development

Surveys of Theory, Evidence and Policy

Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde

In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.

Chapter 7: Policy Issues in Market-Based and Non-Market-Based Measures to Control the Volatility of Portfolio Investment

Edmond Valpy Knox FitzGerald

Subjects: development studies, development economics, economics and finance, development economics, financial economics and regulation


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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