Are Foreign Institutional Investors Good for Emerging Markets?

Frenkel, Michael; Menkhoff, Lukas

doi:10.1111/j.1467-9701.2004.00646.x

Cited by 31 publications

(16 citation statements)

References 51 publications

(51 reference statements)

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“…12 See, for example, Stiglitz and Weiss (1981) and Williamson (1987). For the role of asymmetric information in influencing institutional investors, see Frenkel and Menkhoff (2004). 13 The role of contagion in private capital flows is taken up by Hernandez et al (2001).…”

Section: Discussionmentioning

confidence: 98%

Global capital flows and development: A Survey

Goldin

Reinert

2005

The Journal of International Trade & Economic Development

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From a development perspective, capital flows can both provide significant benefits and entail significant costs. Consequently, the development impacts of capital flows do not readily lend themselves to simple generalizations. This survey considers the development benefits and costs of four kinds of capital flows: foreign direct investment, equity portfolio investment, bond finance, and commercial bank lending. The survey suggests that the development impacts of these flows are conditional on both their specific characteristics and the larger policy environments in which they take place. It claims short-term superiority for foreign direct investment and equity portfolio investment over bond finance and commercial bank lending, and offers a set of policy recommendations to make capital flows more development-friendly.Capital flows, foreign direct investment, financial development,

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Section: Discussionmentioning

confidence: 98%

Global capital flows and development: A Survey

Goldin

Reinert

2005

The Journal of International Trade & Economic Development

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“…After this period, for most measures, the relative performance of the Polish market returned to pre-1999 levels or worse. This suggests that worries expressed by several researchers (e.g., Singh, 1996;Frenkel and Menkhoff, 2004) about the negative impact of the appearance of big institutional investors on underdeveloped markets may be correct. That is, enforced home bias on emerging markets may be detrimental to the long-run development of the market.…”

Section: Discussionmentioning

confidence: 99%

“…In contrast, Frenkel and Menkhoff (2004) argue that "activities of foreign investors in emerging economies (…) are not simply positive for these countries but also can exert adverse effects". They argue that foreign (less informed) investors may have a strong negative impact on the relative position of local investors as "they are likely to amplify occurring imbalances or even trigger financial shocks".…”

Section: Literature Review and Backgroundmentioning

confidence: 99%

“…In addition, if a local market is dominated by pension funds, it leaves very little room for other domestic investors (institutional and private), and, in particular, for international investors. As Frenkel and Menkhoff (2004) point out, crowding out international investors and placing them in the position of less informed market participants can scare them away and hamper the local market development in the long run. Despite all these potential shortcomings local governments do not seem particularly interested in opening borders for financial flows, and even if they do not restrict international investments, they do not stimulate them either.…”

Section: Literature Review and Backgroundmentioning

confidence: 99%

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Is Locking Domestic Funds into the Local Market Beneficial? Evidence from the Polish Pension Reforms

Zalewska

2006

SSRN Journal

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This paper is concerned with the effect of enforced home bias on the development of emerging stock markets. It provides a detailed study of the impact on the Warsaw Stock Exchange of the Polish pension fund reforms and the associated restrictions on international investment. The time path of market development for the Warsaw Stock Exchange is compared with a benchmark sample consisting of the other seven post-communist countries that joined the EU in May 2004. It is shown that benefits arising from the pension funds' increased investment in the home market are short-lived. In the long run, the relative performance of the Polish market returned to pre-1999 levels or worse, suggesting that enforced home bias on emerging markets may be detrimental, rather than beneficial, to the long-run development of the market.

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“…Recent years have witnessed significantly increased capital flows by foreign institutional investors (FIIs) to emerging economies (Frenkel & Menkhoff, 2004;Liu, Bredin, Wang, & Yi, 2014). In this paper, we build upon the literature on institutional investor activism and focus on the trading activities of these FIIs.…”

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confidence: 99%

Informed trading by foreign institutional investors as a constraint on tunneling: Evidence from China

Zhang

Yang

Strange

et al. 2017

Corporate Governance

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Manuscript Type: EmpiricalResearch Question/Issue: This paper investigates how the trading activities of foreign institutional investors (FIIs) affect the tunneling activities of controlling shareholders in an emerging economy (China).Research Findings/Insights: We use an unbalanced panel dataset of 167 FIIs with investments in Chinese real estate firms during the period 2003 to 2011, which gives us 1006 firm-year observations in total. We find strong support for our hypothesis of an inverted U-shaped relationship between FII trading turnover and the extent of tunneling by controlling shareholders.Theoretical/Academic Implications: In many emerging economies, the institutional environment for investor protection is weak. Powerful controlling shareholders may take the opportunity to extract private benefits via tunneling activities to the detriment of minority shareholders, and informed minority investors may also take advantage of less well-informed investors.There are thus multiple principal-principal agency conflicts. FIIs are a particularly important group of informed investors. On the one hand, large-scale aggressive trading by FIIs should drive stock prices to fundamentals, provide market discipline to management, and thus limit tunneling. On the other hand, FIIs may opt to exploit their private knowledge to gain trading profits at the expense of uninformed investors, and implicitly support tunneling. We highlight these potential effects, and demonstrate empirically an inverted U-shaped relationship between FII trading turnover and the extent of tunneling.Practitioner/Policy Implications: Tunneling is a serious issue, particularly in emerging economies where the institutional arrangements for minority investor protection are often weak.FII involvement may enhance market discipline, but may also exacerbate the problem, so policymakers need to guard against potential adverse effects. An ownership cap on FII shareholdings is unlikely to be effective, but policymakers might strengthen QFII license revocation policies and issue more licenses to promote competition among FIIs.

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Are Foreign Institutional Investors Good for Emerging Markets?

Cited by 31 publications

References 51 publications

Global capital flows and development: A Survey

Global capital flows and development: A Survey

Is Locking Domestic Funds into the Local Market Beneficial? Evidence from the Polish Pension Reforms

Informed trading by foreign institutional investors as a constraint on tunneling: Evidence from China

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