Latin American Capital Markets

506 KENROY DOWERS, RUBEN LEE, AND ANTONIO VIVESstructure functions: listing, information dissemination, order routing, trading, clearingvia a central counterparty, settlement, and marketing.The second form pertains to policies that are implemented to promote domesticmarket development but also have an impact on market integration. Thesemay include improvements in supervision and regulation to bring them up to internationallyaccepted standards. The implementation of these standards helps towardthe harmonization of financial regulations internationally and thus may be considereda step toward international integration.The third form of regional integration refers to policies that arise from theongoing efforts to develop regional and subregional economic integration and thataffect the functioning of securities markets and stimulate their integration. In LatinAmerica and the Caribbean, these subregional initiatives include the Andean Pact, theNorth American Free Trade Agreement (NAFTA), the Central American CommonMarket (CARICOM), and Mercosur It is interesting that many of the regional initiativeshave little in terms of explicit policy objectives to formulate regional capital markets.Thus, it comes as no surprise that the impact of these initiatives for regional capitalmarket development has been minimal at best.The benefits of securities market integration are relevant for investors, issuers,and the economy in general. Some of the specific benefits as summarized byLee (chapter 6, this volume) include more efficient, liquid, and broader markets; lowernet returns (after transaction costs); greater innovation that allows for portfolio diversification;and enhanced risk-return frontiers, particularly for investors who face restrictedopportunities.The literature on ADR and the analysis of overseas listing demonstrate that,based on information economies and target marketing by the issuer, cross-border investmentis driven mainly by familiarity and geographic proximity. Sarkissian and Schill(2001) report that there is evidence that firms tend to follow a graduated approach,where they start cross-listing in G-5 economies, then add neighboring countries andother more familiar markets.This approach could be explained in terms of the costof global information for firms from emerging economies. Lee (2002) discusses thebenefits of securities markets, including their contribution toward improving marketdepth and increasing market liquidity.The costs of securities market integration can be seen on two levels: the shorttermtransaction and transition costs for implementation of the process of integrationand the costs incurred by independent interests that are directly affected through theloss of market power Pertaining to the former; the integration process requires appropriatelegal/regulatory reform, which can be costly in monetary terms due to the needCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub