International Business Environment
Tutors: Irene Greaves, Linda Onyeka
Student Name: Sihao Xie
Date: 14 JANUARY 2002
Dictionary of Business defines the capital market as a market in which long-term capital is raised by industry and commerce, the government, and local authorities. The money comes from private investors, insurance companies, pension funds, and banks and is usually arranged by issuing houses and merchant banks. Stock exchanges are also part of the capital market in that they provide a market for the shares and loan stocks that represent the capital once it has been raised. It is the presence and sophistication of their capital markets that distinguishes the industria l countries from the developing countries, in that this facility for raising industrial and commercial capital is either absent or rudimentary in the latter.
The global capital market has grown so rapidly in recent decades. So I would like to discuss about it in the essay.
This essay is organized as follow, introduction, body, conclusion. In the body part, Section 1 shows why has the global capital market grown so rapidly in recent decades. Section 2 talks about the continuance of the growth throughout the 2000s.
1. Why has the global capital market grown so rapidly in recent decades
In recent decades, the global capital market has grown so rapidly because of the rise of privatizations mainly. With private capital flows rising from less than 5 percent of world GDP in 1975 to about 20 percent today, privatizations have significantly increased market liquidity. And also privatization takes a potential role global capital market development.
A. The Rise of Capital Market-Based Finance
Capital market-based finance has in fact been increasing in importance, both absolutely and relative to financial intermediary-based finance, in both developed and developing countries over the past decade. And also capital markets are in fact winning the present and seem likely to dominate the future of corporate finance in developed and developing countries alike.
a. The Stable Role of Commercial Banking in Modern Economies
Ordinary "relationship banking" appears to be (at best) holding its own as a source of corporate financing around the world, and is more likely in decline. The bits of banking that are growing rapidly are those parts that provide high value-added products (especially risk management tools) and provide large-scale syndicated credits to corporate borrowers. During the late-1980s and early-1990s, when Japan and Germany appeared to be outperforming major capital market-oriented countries such as Britain and the US, the academic literature often favored bank-based systems. Examples of& nbsp;this literature include Prowse (1992), Kester (1992), and Porter (1992), while the supporting arguments are summarized in Maher and Andersson (1999) and Tsuru (2000). More recently, however, the weight of opinion has swung strongly in favor of the idea that capital markets have decisive comparative advantages over banks and other financial intermediaries as optimal monitors and financiers of a nation's corporate life. This reassessment has been driven in part by the observation, discussed at length above, that capital markets have been prospering relative to banks for many ;years now. The repetitive nature--and massive costs--of banking crises in developing and developed countries alike has also convinced many observers that banks are inherently fragile institutions, whose role in corporate finance should be minimized as much and as quickly as possible (Economist (1997, 1999)).
b. The Rapid Growth in Stock Market Capitalization and Trading Volume Since 1983
From 1983 to 2000, this was a period of very rapid growth in the capitalization of markets in every country except Japan. Total world market capitalization increased over ten-fold (to $ 35.0 trillion) between 1983 and 1999, and the total capitalization of the US market increased almost nine-fold (from $ 1.9 trillion to $ 16.6 trillion) over the same period.
c. The Dramatic Growth in Securities Issuance Volume Since 1990
Another way of measuring the rise of capital markets is to examine whether their share of annual corporate financing activity has grown relative to that of other sources of funding. Security offerings by US issuers accounted for two-thirds of the global total throughout 1990-1999, that implies that non-US securities issues in creased from $ 191 billion in 1990 to $ 750 billion in 1998, and then to $ 1.19 trillion in 1999. The surge in non-US issuance volume in 1999 was largely due to the popularity of euro-denominated bond issues, which actually exceeded&n bsp;dollar-denominated bond issues for much of 1999.
d. The Phenomenal Growth in Venture Capital Financing in the United States
One highly specialized, but extremely important type of financing has also grown very rapidly over the past decade, and especially so since 1997. This is venture capital investment by US venture capital partnerships. The fund-raising patterns of these private equity investors are discussed in Gompers and Lerner (1998), and the competitive advantages of US venture capitalists versus those in other developed countries are described in Black and Gilson (1998).
e. The Surge in Mergers and Acquisitions Worldwide
The almost incredible increase in the total volume of merger and acquisition activity that has occurred since 1990. While takeovers have always played an important role in the United States, the rise in M&A (Merger and Acquisition) activity in Europe during the 1990s was even more dramatic. From less than $ 50 billion annually in the late-1980s, the total value of M&A involving a European target reached $ 592 billion in 1998, before more than doubling to $ 1.22 trillion in 1999--rivaling the US total. The global value of M&A activity in 1999 reached&n bsp;$ 3.4 trillion, an astounding 10% of world GDP.
Next I will document that share issue privatizations have truly transformed share ownership patterns of investors in many different countries.
B. Privatization's Impact on Stock and Bond Market Development
We should be careful in inferring causation regarding privatization's impact on market growth, since a shift in ideology or some other exogenous political or economic change might have caused both the privatization and the overall boom.
a. Total Proceeds Raised by Privatization Programs
It is clear that national governments have been among the biggest winners from privatization programs, since these have dramatically increased government revenues, which is clearly one reason the policy has spread so rapidly. As mentioned above, Privatisation International [Gibbon (1998, 2000)] reports that the cumulative value of proceeds raised by privatizing governments exceeded $ 1 trillion sometime during the second half of 1999. As an added benefit, this revenue has come to governments without having to raise taxes or cut other public services.
b. Privatization's Impact on International Investment Banking
All international investment banks compete fiercely for share issue privatization mandates, for two principal reasons. First, because the offerings are so large and so visible--and are almost always designed to help promote the market's capacity to absorb subsequent stock offerings by private companies--these are very prestigious mandates. To date, the large US and British brokerage houses have had the most success in winning advisory and underwriting mandates, though all countries that launch large-scale SIP programs tend to favor local investment banks as "national champions" to& nbsp;handle the domestic share tranche. The second reason banks compete so fiercely for SIP mandates is because they can be extremely profitable. In spite of the fact--documented by Jones, et al (1999) and Ljungqvist, et al (2000)--that SIPs have significantly lower underwriting spreads than private sector offerings, their sheer size and lack of downside price risk make them very lucrative for underwriters.
2. Will this growth continue throughout the 2000s?
As we indicated above, the global capital market has grown so rapidly in recent decades cause of the privatizations rise. Privatizations increased the market liquidity. Now we have already stepped into the 21st century. I believe that the growth will continue for the following reasons. First, most of the south-east Asia countries have recovered from the 1997 financial crisis. For these countries, they now have the capital to do businesses. And they get back on the fast growing track. Second, by the end of 2001, world's biggest developing country, China, has ;entered the WTO (World Trade Organization). This is real great news. As we all know, today's China takes a serious position in world's economy. Its innovation and opening policy make china keep achieving high GDP growth rate. This drives the global capital market keep growing.
Summary and Conclusions
This essay examines the impact of share issue privatizations (SIPs) on the growth of world capital markets (especially stock markets). I begin by documenting the increasing importance of capital markets, and the declining role of commercial banks, in corporate financial systems around the world. I then show that privatization programs-- particularly those involving public share offerings--have had a dramatic impact both on the development of non-US stock markets and on the participation of individual and institutional investors in those stock markets.
This has told the reason of the fast growth of global capital market. And then I succinctly indicated the continuance of the rapid growth, the great future.
The last but not the least is the recommendation. I can confidently assert that, if executed properly, a series of share issue privatizations can indeed promote the growth of global capital market, which will yield economic and political dividends for many years to come. That means there is a need to encourage the development of SIPs in order to gain growth of global capital market.
Dictionary of Business, Oxford University Press, ? Market House Books Ltd 1996
The Economist (April 12, 1997), "Fragile, Handle With Care: A Survey of Banking In Emerging Markets."
The Economist (April 17, 1999), "On A Wing and A Prayer: A Survey of International Banking."
Gibbon, H., 1998, "Worldwide Economic Orthodoxy," Privatisation International 123, 4-5.
Gibbon, H., 2000, "Editor's Letter," Privatisation Yearbook, London, Thomson Financial, 1.
Gompers, P. and J. Lerner, 1998, "What Drives Venture Capital Fundraising?" Brookings Papers On Economic Activity--Microeconomics, 149-192.
Jones, S.L., W.L. Megginson, R.C. Nash, and J.M. Netter, 1999, "Share Issue Privatizations As Financial Means To Political and Economic Ends," Journal of Financial Economics 53(2), 217-253
Kester, W.C., 1992, "Governance, Contracting and Investment Horizons," Journal of Applied Corporate Finance 5(2), 83-98.
Ljungqvist, A.P., T. Jenkinson and W.J. Wilhelm, Jr., 2000, "Has the Introduction of Bookbuilding Increased the Efficiency of International IPOs?" New York University Working Paper.
Maher, M. and T. Andersson, 1999, "Corporate Performance: Effects On Firm Performance and Economic Growth," OECD Working Paper (Paris).
Prowse, S., 1992, "The Structure of Corporate Ownership in Japan," Journal of Finance 47(3), 1121-1140.
Porter, M.E., 1992, "Capital Choices: Changing the Way America Invests in Industry," Journal of Applied Corporate Finance 5(2), 4-16.
Tsuru, K., 2000, "Finance and Growth, Some Theoretical Considerations and A Review of the Empirical Literature," OECD Working Paper Series, No 228.
data from the Statistics section of the International Federation of Stock Exchange's website (www.fibv.com).