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Have Capital Markets Aided Growth in China and India?

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Among the most notable developments in the global economy over the past 20 years has been the rise of China and India as world economic powers. Along with high overall growth in these economies has come an increase in their financial activity. But how much have different types of firms used capital markets and benefited from their expansion?

In a new study and VoxEU column, we argue that the expansion of financing to the private sector in China and India has been much more subdued than the aggregate measures of financial depth suggest. Although capital raising activity in equity and bond markets expanded substantially in 2005–10, it remained small as a percentage of GDP. Importantly, this expansion was not associated with widespread use of capital markets by firms. Not only have few firms made recurrent use of equity and bond markets; even fewer firms have captured the bulk of the capital market financing. Moreover, firms that use equity or bond markets are very different from—and behave differently than—those that do not do so. While non-issuing firms in both China and India grew at about the same rate as the overall economy, issuing firms grew twice as fast in 2004–11.

The findings suggest that finance matters, but in more nuanced ways than previously thought. Even though the financial markets in China and India arguably are not yet fully developed, the firms that are able to raise capital do appear to benefit from it, particularly in their overall expansion. In other words, at least part of the high growth in these countries seems to come from the firms that are able to raise new funds from the markets.

Furthermore, the findings suggest that even large firms appear to be partly financially constrained. The difference in performance observed between users and nonusers of capital market financing suggests that for the group of publicly listed firms that issue securities, performance is sensitive to the external capital raised. That firms perform differently and expand when they raise capital also implies that they had investment opportunities ex ante that they could not realize. While we show that capital raising activity is related to changes in firm dynamics, we do not analyze to what extent the effects are driven by the supply side (capital markets) or the demand side (firms). Doing so requires further research.

In recent decades many emerging economies have undertaken large efforts to increase the scope and depth of their capital markets and to liberalize their financial sectors as a way to complete and increase the provision of financial services. But expanding capital markets might tend to directly benefit the largest firms—those able to reach some minimum threshold size for issuance. More widespread direct and indirect effects are more difficult to elucidate.


Tatiana Didier and Sergio L. Schmukler. 2013. "The Financing and Growth of Firms in China and India: Evidence from Capital Markets." Policy Research Working Paper 6401, World Bank, Washington, DC. Forthcoming in Journal of International Money and Finance.

Tatiana Didier and Sergio L. Schmukler. 2013. "Finance and Growth in China and India: Have Firms Benefited from the Capital-market Expansion?", May 6.


Sergio Schmukler

Research Manager, Development Research Group, World Bank

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