The Investment Capital for Corporate Businesses

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Both for small and large companies, stock markets appear as a major source of raising capital and these companies further use the capital in the expansion of the organization. Therefore, by providing liquidity to companies, the stock market plays a very significant role in supporting financial systems of companies. The internationalization of the world’s capital markets has enhanced the role of equity markets in encouraging capital inflows. Woepking (2007) argues that internationalization of capital markets have given the opportunity to investors to diversify their risk. Investors like individuals and companies diversify the risks of their portfolios by investing in equity markets of foreign companies. The foreign direct investments capital inflow is increasing in the emerging economies. In 1995, total foreign direct investment to developing economies increased by 38 percent of global FDI and rose to the US $95 billion as compared to the US $25 billion and 12 percent of global FDI in 1990 (Wilhelms amp. Witter, 1998). Foreign direct investment as direct investment is considered very important in modernizing the national economy and its growth (Alfaro, Chanda, Ozcan amp. Sayek, 2000). Therefore, it is interesting to discuss whether increasing foreign direct investment inflow in the emerging economy is associated with the transmission mechanism of the stock market or not.There are two major groups of findings on the relevant topic. One group of researchers have evaluated a positive role of the stock market as a transmission mechanism to attract foreign direct investments. The other group of researchers’ support that FDI is a substitute to the stock market or stock market cannot play an important role because of less confidence of foreign investors on the capital markets of emerging economies.Stock markets increase the benefit for the investors because their access to information about the firms becomes easy and corporate governance is also improved (Kyle, 1984 and Holmstrom amp. Tirole, 1993 cited in Nowbutsing amp. Odit, 2009).