How FPI Boosts Capital Markets to Develop Market Efficiency
Due to numerous capital market crises that have taken place in the past few years, there’s a global tendency to compare Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) and explore the relationship between the 2 investment modes, with a leaning toward praising FDI while relatively belittling FPI.
Rumors aside, almost all economic and investment experts believe otherwise, constantly arguing that both FPI and FDI are vital to driving local, regional, and global economic growth, that sustainable growth in both developing and industrialized economies will only be achieved by a blend of direct and portfolio investment, and, finally, that growth and development in any country can’t be achieved without an efficient capital market.
With this in mind, it’s time to focus our argument on the impact of FPI on capital markets in host countries and dive deeper into how this form of investment helps develop market efficiency in the countries that receive foreign portfolio investments.
FPI and Market Efficiency in Host Countries
When it comes to FPI host countries, there’s no doubt that FPI inflows would increase the liquidity of these nations’ domestic capital markets, and play a vital role in developing market efficiency as well.
With capital markets getting more liquid and broader through sound FPI, a larger variety of investments can be financed, and we can reach a situation where new companies, especially startups, may have a greater chance of receiving reasonable financing. Further, individuals who save money will have a better chance to invest their cash with a guarantee that they can manage their portfolio, or sell their securities anytime they decide to access their savings.
Besides, in host countries, FPI would typically result in more compliance with global standards in accounting, information disclosure, and transparency in addition to injecting further discipline in the host country’s capital markets. Ideally, in a capital market enriched with investments, FPI investors will normally spend more resources researching new investment opportunities. Also, companies that seek financing will have to meet investors’ demands for more information disclosure, which will result in more transparency, a trend that will certainly spill over into other economic sectors.
In addition, with enterprises seeking and competing for funding, these companies will be rewarded for better performance and better corporate governance, which further contributes to boosting market efficiency.
There’s also another important benefit. The boosting of a capital market via FPI means that equity prices will gradually reflect enterprises’ real values, resulting in a more efficient allocation of capital flows. Also, the equity markets that perform well through FPI will facilitate takeovers, which plays a vital role in turning poorly performing companies into efficient and more profitable corporations in a way that improves the company’s financial position, increases ROI for investors, and, thereby, drives the host country’s domestic economy.
Furthermore, FPI will introduce local capital markets to advanced instruments and tech solutions for managing portfolios, which will contribute in the long run to improving risk management opportunities for both foreign and domestic investors.
So, what about the Annual Investment Meeting?
FPI at AIM
At AIM Global 2023, the topic of how FPI contributes to boosting domestic capital markets to develop market efficiency is one among a broad range of important subjects that the 12th edition of the event will tackle through multiple panels, sessions, and workshops — where renowned FPI experts will provide event participants and delegates with informative insights into many important topics, including the benefits of FDI, the advantages of FPI, how the benefits of the two investment modes are complementary, why sufficient capital flows are necessary for global economic growth, and, last but not least, why the best approach is to foster both forms of foreign investment, FDI and FPI.
