During past decades, firms from emerging economies have significantly increased the amount of financing obtained in capital markets. Whereas the discussions argue that international markets have been an important contributor to this process, the role of domestic markets is mostly unknown.
In a new paper (Abraham et al., 2019), we study the case of East Asia, which accounts for the bulk (about 70 percent) of the capital raising activity in emerging economies. We document that the use of domestic capital markets by firms in emerging economies has grown significantly faster than that of international markets since the 1990s, particularly in the aftermath of the 2008-09 Global Financial Crisis. Domestic issuance activity has grown relatively faster than international activity in other emerging economies, as well.
Domestic capital markets attract more and smaller firms than international markets. Thus, as domestic markets grew, the size of issuing firms declined and the extensive margin expanded. Domestic markets also helped some corporations to diversify funding sources and obtain domestic currency financing. Access to different markets allows the largest issuers to mitigate negative shocks in one market by raising more funds in other markets. For example, when international debt markets collapsed during the Global Financial Crisis, firms in East Asia moved from international to domestic bond markets. This spare tire function was not present during the Asian Financial Crisis, when domestic capital markets were less developed.
In terms of policy lessons, domestic capital market growth in East Asia does not seem to be accidental. This growth occurred while policy makers implemented a series of capital reforms in response to the Asian Financial Crisis. But identifying which specific policy reforms helped to jump start this process is not an easy task. East Asian economies implemented reforms of diverse kinds over an extended period. It might be the case that no single reform was more relevant than others and, instead, the whole reform process might have acted as a signal to the market that policy makers were committed to developing domestic capital markets. Further analysis on the impact of capital market reforms in East Asia is needed.
In sum, whereas international capital markets have indeed been an important contributor to the corporate finance boom that started in the 1990s, domestic markets have played an even more important role in the new millennium.