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Factors behind the development and Internationalization of Capital Markets Essay

Financial markets especially the stock market has considerably developed in the past few decades. Several factors have been seen to have aided in their growth and development globally. It has also increased cross-border capital movement, tight links amongst the financial market. The most important element of global market has been increased stock exchange. This paper is therefore aimed at finding the factors which have led to the development and Internationalization of stock exchange facility.

Questions to be investigated

Objectively, the paper is to disclose the possible factors affecting the Development and internationalization of the capital markets. It is therefore worth notice that these questions has to be addressed: What are the factors that favor the development of international markets?, What are the hindrances in the achievement of fast development of international capital markets? And how do these factors that affect the development of international capital markets affect the domestic markets?

Factors influencing the Stock market development and internationalization

A least two possible views exists on how economic fundamentals may influence domestic stock market and internationalization.  One of the views is that better institutional and macroeconomic environments spur more developed domestic stock markets hence reduces the need to of the use of international markets.

The second part of it is behind a number of recent papers on internationalization, this has no longer been an international finance research topic. With regard to this view, it has been found that poor domestic environments prompt firms and investors to use international markets more intensively. In this, the poor domestic environment has been is considered as one of the main reasons for capital flight and greater use by domestic residents of all types of financial services offered internationally (Collier et al, 1999). This also applies to the services offered by the stock markets, where firms may want to escape a poor domestic system with weak institutions.

The recent papers done on where international marketers are considered to be more attractive to the firms from poor institutional environments, this is because they offer better protection to investors. As a result, according to this view poor domestic markets lead to worse domestic development. What comes out clearly in this view is the assumption that even firms from poor domestic environments can choose to go international and will wan to internationalize even more especially if they are located in a country with poor institutional environment and weak capital markets.

A second view is based on the fact that a better domestic environment in creases the attractiveness of assets to investors. The markets offer larger amounts of external financing, higher liquidity and lower cost of capital when the firm’s host country improves. Under this view, macroeconomics and institutional factors determine the relative willingness of domestic and international investors to supply financing to firms. Investors in international markets may however reward a better environment more than investors in domestic markets do.

If thee be an access to the international markets, then better fundamentals will also be available hence it leas to more use of capital markets. Moreover, with liquidity agglomerating in one market, a process of improved fundamentals and increased internalization may have negative effects on the domestic markets, providing international markets with greater advantage.

For this reason, there are arguments for both the positive and negative impact on internationalization in those fundamentals that help to develop the local markets.


Collier, Hoeffler, and Pattilo, (1999); Determinants of Capital flight

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