BU2207
International Business Environment
Tutors: Irene Greaves, Linda Onyeka
Student Name: Sihao Xie
Date: 14 JANUARY 2002
Introduction
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 industrial 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.
Body
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 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)).
