World Bank Document

ility of management and control. Thus far, almost ment would allow investors to hold a broader
all portfolio investment has been in the markets of range of international assets. Significantly, the
the major industrial economies or in a few devel- returns from investing in the stock markets of the
oping countries (such as Malaysia and Mexico). United States and other big industrial countries
During the past five years, however, a number of have not been synchronized with the returns from
developing countries have emerged as potential developing-country markets, so the widest spread
markets for portfolio investment. For example, of assets has also been the least risky. Furtherequity
funds of Brazilian, Indian, Korean, and more, the returns obtainable from the emerging
Mexican shares have been organized. developing-country markets (excluding Hong
The total capitalization of the developing coun- Kong and Singapore) have recently been highertries'
equity markets amounted to $133 billion in in dollar terms on a cumulative basis-over the
1983. This was more than one-quarter of the Euro- past eight years, more than double that of the
pean market capitalization, and 10 percent of all world's major equity markets (see Table 9.2). Howthe
stocks quoted outside the United States. ever, devaluations and major economic changes in
Excluding Hong Kong and Singapore, the capitali- the developing countries mean that returns have
zation of developing-country markets totalecl $75 been volatile.
billion.
The IFC has supported the development of local Assessment
markets by helping to establish specialized equity
funds for individual countries. One example is the The following principal conclusions emerge from
Korea Fund (see Box 9.6). The IFC has also pro- the preceding review.
posed the formation of investment trusts through * Equity forms of investment can clearly be benwhich
commercial banks would be able to sell eficial to developing countries, and it is desirable
some of their loans to developing countries for that they be increased. Developing countries can
shares. The trusts would then swap the loans reduce the level of risk attached to external capital
bought from the banks for equity stakes in the bor- inflows and secure the benefits of technology and
rowing entities.
expertise transfers by expanding the amount of
In general, developing countries have a reputa- direct investment in total external financing.
tion as high-risk options for portfolio investors * Given that equitv investment is desirable,
from industrial countries. However, such invest- there is a question of how developing countries
Box 9.6
The IFC and foreign portfolio investment: the Korean case
The Korea Fund is one example of the IFC's work in assets will be invested in Korean listed stocks. The fund
trying to stimulate foreign portfolio investment in devel- is managed by Scudder, Stevens & Clark, an American
oping countries. In the early 1980s the Korean authorities investment counseling firm, with the help of Daewoo
decided to open their securities market gradually to for- Research Institute, an investment advisory firm in
eign investors. As a first step, two semi-open-end Korea. The IFC was involved from the beginning and
mutual funds (Korea Trust and Korea International acted as one of the colead managers of the underwriting.
Trust) were offered in the Euroequity market at the end In future years, foreign investment in Korean listed
of 1981. These offerings totaled $30 million (later doubled securities is likely to be liberalized further. As presently
through a second tranche) and were underwritten by envisaged, the guidelines will say that total foreign
leading international securities houses. The minimum investment should not exceed 10 percent of total market
denominations of $10,000 were aimed at institutions and capitalization and that foreign holdings should not
individuals with sizable portfolios. The funds are man- exceed 10 percent of the voting rights of any company,
aged by two established Korean investment manage- with a 5 percent restriction on any single foreign sharement
companies.
holder. As part of this development, leading Korean
As a second step, the Korea Fund was offered to the companies are expected to list their stocks on major
general public as well as institutional investors in mid- international stock exchanges and offer their shares for
1984. This fund is a closed-end investment company, public subscription in the Euroequity market. In addiregistered
with the U.S. Securities and Exchange Com- tion, Korean securities firms are expected to allow intermission
and listed on the New York Stock Exchange. It is national investment banks to take their shares.
expected that normally at least 80 percent of the fund's
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