Page 247 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes 13.1.1 features of Global capital market

attractions of the Global capital market

A global capital market benefits both borrowers and investors. It benefits borrowers by increasing
the supply of funds available for borrowing and by lowering the cost of capital. It benefits
investors by providing a wider range of investment opportunities, thereby allowing them to
build portfolios of international investments that diversify their risks.

the Borrower’s Perspective: a lower cost of capital

In a purely domestic capital market, the pool of investors is limited to the residents of the country.
This places an upper limit on the supply of funds available to the borrowers. A global capital
markets, with its much larger pool of investors, provides a larger supply of funds for borrowers
to draw on.
The important drawback of the limited liquidity of a purely domestic capital is that cost of capital
market tends to be higher than it is in international market.

The Investor’s Perspective: Portfolio Diversification

By using the global capital market, investors have a much wider range of investment opportunities
than in a purely domestic capital market. The consequence is that investors can diversify their
portfolios internationally thereby reducing their risk below that could be achieved in a purely
domestic capital market. By holding a variety of stocks in a diversified portfolio, the losses
incurred when some stocks fail to live up to their promises are offset by the gains enjoyed when
other stocks exceed their promise.

13.1.2 Growth of the Global capital market

According to data from the bank for international settlements, the global capital market is
growing at a rapid pace. There seem to be two reasons for rapid growth-advances in information
technology and deregulation by government.

information technology

Financial Services is an information-intensive industry. It draws on large volumes of information
about markets, risks, exchange rates, interest rates, credit worthiness, and so on. It uses this
information to make decisions about what to invest where, how much to charge borrowers, how
much interest to pay to depositors, and the value and riskiness of arrange of financial assets
including corporate bonds, stocks, government securities and currencies.
The growth of international communication technology has facilitated instantaneous
communication between any two points on the globe. At the same time, rapid advances in data
processing have allowed market makers to absorb and process large volumes of information
from around the world. With the rapid rise of internet and the massive increase in computing
power that we have seen since 1990, it seems likely that the cost of recording, transmitting, and
processing information has fallen by a similar amount since 1990 and is now a trivial amount.
Such developments have facilitated the emergence of an integrated international capital market.
It is now technologically possible for financial services companies to engage in 24-hour-a-day
trading, whether it is in stocks, bonds, foreign exchange, or any other financial asset. Due to
advances in communications and data processing technology, the international capital market
never sleeps.

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