Characteristics of Emerging Markets: Market Openness and Long-Term Sovereign Debt

Characteristics Of Emerging Markets Darden Case Study
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Characteristics of Emerging Markets Darden Case Study
Define Market openness to foreign investors and explain the limits of its efficiency in providing economic growth in developing countries in the context of boom-bust financial cycles.
Market openness is the degree to which foreign investors are permitted to invest in companies listed in a given market and their ownership stake in the listed stocks. A typical open market has little or no restrictions to free-market activities. It is exemplified by the absence of constraints to foreign investments, such as tariffs, licensing agreements, taxes, and regulations that may obstruct free-market activities. While open markets lack regulatory barriers to investment, they have competitive barriers to entry. The lack of restrictions means that the pricing of goods is driven more by the economic laws of supply and demand rather than interference from governmental agencies and large conglomerates. Additionally, market openness means investors can voluntarily trade without prohibitions.
Open markets differ from closed markets, which apply to foreign investment and ownership restrictions. Common restrictions to foreign investment include national limits on aggregate foreign ownership, company-imposed limits on aggregate foreign ownership, limits on single foreign shareholding, and special classes of shares for foreign investors. Such prohibitive regulations mean pricing is controlled by factors outside the fundamental laws of supply and demand. Market openness can be assessed using the investible index, which reveals the amount of market capitalization foreign investors can attain in a firm.
While open markets may seem attractive to investors and economies, their efficiency in providing economic growth for developing nations is limited, especially in the context of boom-bust financial cycles. This is because open markets operate under the forces of demand and supply (Sattorov, 2020). Markets that operate under essential supply and demand, such as the United States, experience boom and bust cycles. During boom cycles, central banks make it easier for investors to obtain credit by significantly reducing interest rates. Low-interest rates translate to heavy borrowing by businesses and investors. The borrowed money is then invested in stocks and houses, which leads to higher returns on investments (ROIs) and overall economic growth.
Even so, when interest rates are low and credit is easy to obtain, this leads to excessive borrowing and overinvestment. The excess investment results in excess supply, meaning that the overinvested assets eventually decrease in value, and investors experience losses. Overinvestment can also cause companies to cut spending and employment. In worst-case scenarios, a bust cycle can cause a recession, which will contribute to a loss of trust on the part of the investors and a subsequent downward economic spiral.
What is the significance/what can you infer from a country's ability to issue long-term sovereign debt (bonds), with a fixed rate, issued in local currency?
A country's ability to issue long-term sovereign debt with a fixed rate using local currency signals to investors that the nation is trustworthy. In other words, if a government can borrow money using local currency at a fixed rate for a relatively long period in a market, the institutions of that economy can be trusted, and it i...