The quest for capital — and for places to invest it — extends beyond national borders.
When companies open business operations abroad, or form joint partnerships with companies based in other countries, they become players in an international capital marketplace. The same is true when individual or institutional investors put their capital to work outside their national borders.
Mature and developing
One benefit of cross-border investing is that strong economic growth in one part of the world can stimulate growth in other regions. That can be good for the investors and good for the economies where the markets operate. One potentially negative consequence of globalization, however, is that problems in the economy of one nation or region may have a ripple effect on the economies of many others — even though the major factor in any nation’s financial health is what’s happening at home. Broadly speaking, world markets fall into two categories: mature and developing.
Mature markets, including those in Europe, North America, Australia, New Zealand, and Japan tend to be highly regulated and provide a welcoming environment for matching seekers with providers of capital. They also foster an active secondary market.
Developing markets, also known as emerging markets or economies, are usually newer than mature markets and have fewer active participants, resulting in less liquidity and greater volatility. The trading mechanisms are often less efficient as well. These markets may also be more vulnerable to political control or instability, particularly if the country has a short history of democracy or if ethnic and religious controversies threaten to disrupt economic development.
Being labeled as developing or emerging is not always a clear indication of how a market operates. For example, some of these markets are more vibrant and stable than others, and tend to attract more investor attention because they offer opportunities for long-term gain. This is especially true where local populations are becoming more affluent and the economies have shown sustained growth.
When the World Bank identifies member nations as developing countries, its main criterion is income per capita rather than the sophistication of its financial markets.
Some markets are open to all investors, while others limit the participation of nonresidents. That’s because some nations face a dilemma in seeking international capital: On the one hand, this capital can provide welcome growth. But at the same time, it may have the potential to undermine domestic control and stability.
When they do seek to attract international investment, securities markets in emerging economies have strengthened their regulatory practices, improved transparency, and streamlined their clearance and settlement systems for handling the exchange of securities and cash payments.
US investors seeking greater diversification may look abroad when they have capital to invest. At the same time, companies based abroad may want to tap the wealth of the US markets. If they do, they may offer shares of their stock on the US market through a US bank, which is known as a depositary.
In this arrangement, the depositary bank holds the issuing company’s shares, known as American depositary shares (ADSs). The bank offers investors the chance to buy a certificate known as an American depositary receipt (ADR), which represents ownership of a bundle of the depositary shares.
To have their ADRs listed on an exchange, companies must provide English-language versions of their annual reports, adhere to accepted US accounting practices, and grant certain shareholder rights.
In addition, they must meet listing requirements imposed by the exchange or market where they wish to be traded. In reality, many ADRs aren’t listed on an exchange, often because they are too small to meet listing requirements. Instead, they’re traded over-the-counter (OTC). Some of the issuing companies register with the SEC and submit the required filings. Others do not, which means you may not be able to get the same level of information about the company as you can with a registered ADR. The OTC markets are also generally less liquid than the major exchanges, which can make OTC ADRs more difficult to sell at the time and price you want.
The World bank
When a company makes depositary arrangements to sell its stock in two or more countries, the shares are called global depositary shares and they are sold as global depositary receipts (GDRs). In all other ways, they work the same way as ADRs.
The World Bank, or, more formally, the International Bank for Reconstruction and Development (IBRD), is an investment bank that raises money by issuing bonds to individuals, institutions, and governments in more than 100 countries. The bonds are guaranteed by the governments of the 188 countries who own the bank.
The World Bank lends the money from its investors to the governments of developing countries at affordable interest rates to help finance internal projects and economic policy reforms. In fact, long-term loans to the poorest nations through the bank’s International Development Association (IDA) are interest free.
The Bank’s International Finance Corporation (IFC) provides funds for private enterprise in developing nations and helps stimulate additional financing from other investors. Its affiliate, the Multilateral Investment Guarantee Agency (MIGA), promotes private investment by providing guarantees that protect investors from political risks, such as the possibility that public corporations could be nationalized. Without this safety net, investors might otherwise be reluctant to participate.
All You Have To Know About Global Capital Markets by Inna Rosputnia
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