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Cracking the Emerging Markets Enigma$

G. Andrew Karolyi

Print publication date: 2015

Print ISBN-13: 9780199336623

Published to Oxford Scholarship Online: June 2015

DOI: 10.1093/acprof:oso/9780199336623.001.0001

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(p.223) Appendix C Measures of Foreign Investability Restrictions

(p.223) Appendix C Measures of Foreign Investability Restrictions

Cracking the Emerging Markets Enigma
Oxford University Press



Sources and Definitions

Capital Access

Milken Institute Capital Access International Index

The index of 121 countries worldwide (including 18 in Latin America) looks at seven key components that can make it easier or more difficult for entrepreneurs to access capital. Those components are macroeconomic environment, economic institutions, financial and banking institutions, equity market, bond market, alternative capital, and international access. See Barth, Li, Lu, and Yago, eds., Capital Access Index 2009.

Investability Ratio (Standard & Poor’s Emerging Market Database)

  • The measure of openness is equal to the fraction of the market capitalization of the market at the end of 2002 that is investable as dictated by the Standard and Poor’s Emerging Markets Database (EMDB). My score is based on the market capitalization data from 2009, the last year for which this data exists. The Emerging Markets Database (EMBD) was launched by the International Finance Corporation (IFC) in 1981 to collect data on emerging markets for in-house use. Over time, outside demand from the financial and academic community for this data increased. In 1987, IFC began offering its Indices and underlying data as a commercial product. Using a sample of stocks in each market, the various Indices gave investors a transparent, standardized methodology for performance benchmarks across markets.

  • EMDB was acquired by Standard & Poor’s in January 2000. The S&P/IFCG Indices coverage of foreign equity markets exceeds 75% of total foreign market capitalization. The S&P/IFCI Indices screen stocks for foreign ownership restrictions, factoring in minimum market capitalization and liquidity parameters. Stocks are assigned weights representing the amount foreign institutional investors may buy because of foreign investment restrictions either at the national level or by the individual company’s corporate statute.

Size of the ADR Market

Count of US-listed ADRs as % of Total Count of All Domestic Firms

Number of domestic listed firms with a US listing as an American depositary receipt (ADR) program on a major exchange, over-the-counter or SEC Rule 144a form as fraction of total count of all domestic listed companies (Doidge, Karolyi, and Stulz, “Has New York Become Less Competitive than London in Global Markets?”).

Foreign Banks

World Bank Financial Development & Structure: Consolidated Claims of Foreign Banks to GDP

The World Bank’s Financial Development and Structure Database obtains data from the Bank for International Settlement on foreign claims held by banks from OECD countries in the rest of the world. These claims represent banks’ financial claims extended to residents of a host country either cross-border or domestically via a local affiliate. The claims consist of financial assets such as loans, debt securities, properties, and equities, including equity participations in subsidiaries.

World Bank Financial Development & Structure: Loans from Nonresident Foreign Banks to GDP

See above.

External Balance

Lane & Milesi-Ferretti: Total External Assets & Liabilities to GDP

From a set of indicators created by Philip Lane and Gian Milesi-Ferretti, (www.philiplane.org/EWN.html). One measure computes all external assets and liabilities relative to GDP including foreign direct investment, portfolio equity investment, external debt, and official reserves.

Lane & Milesi-Ferretti: Total External Portfolio and Direct Equity Investment to GDP

See above. This variable considers only foreign direct and portfolio equity investments, on both the assets and liabilities side.

Regulations Affecting Foreign Investors

Registration Requirements

From series of Euromoney Books published in early 2000s and late 1990s. For example, in 1999, The Salomon Smith Barney Guide to World Equity Markets 1999, was published by Euromoney Institutional Investor PLC and Salomon Smith Barney, edited by Jacqueline Grosch Lobo and Rob Irish (Euromoney Books, Nestor House, London). Earlier editions were published jointly with different firms, such as The LGT Guide to World Equity Markets 1996 (Euromoney Books, Nestor House, London). For more recent years, I supplement these data with those from Bloomberg and a number of Form 20-F filings by foreign company registrants of the US Securities and Exchange Commission.

Ownership Restrictions

See the World Bank report at http://iab.worldbank.org/~/media/FPDKM/IAB/Documents/IAB-report.pdf, titled Investing Across Borders 2010. See Table 2.1 in particular, and the supplementary appendix on methodology, which outlines the survey approach by email, phone, or personal interviews and the team’s composition, the survey instruments, and the survey respondents. Table 7.1 outlines each of the indicators and their type as to whether de jure or de facto. See also Converting and Transferring Currency (CTC, September 2013) by lead author John Anderson, of the Global Indicators and Analysis Department in Financial and Private Sector Development of the World Bank Group (http://iab.worldbank.org/~/media/FPDKM/IAB/Documents/FDI-Converting-and-Transferring-Currency.pdf). Four-point scale: if only some sectors are restricted for foreign investors; if broad-based restrictions exist with cap limits; and, if other ownership restrictions exist.

Repatriation Cap Limits

See above. Equals one if any limits on repatriation of profits.

Currency Convertibility Restrictions

See CTC report above. Three-point scale: if currency only partially or nonconvertible, and if not free-floating.

Taxation Affecting Foreign Investors

Withholding Taxes (Equities)

See country reports and various available historical information sources from https://dits.deloitte.com/#TaxGuides. The Deloitte International Tax Source (DITS) site is updated regularly. My information was drawn as of January 2014. See also the United Nations International Trade Center’s Market Analysis Services (http://www.intracen.org/itc/market-info-tools/tariff-data/). Three-point scale: if withholding on dividend or interest income, and if no exemptions for tax-treaty country residents.

Double Tax Avoidance

See DITS above. Four-point scale: if no tax treaty exists, if tax treaties exist with fewer than 20 countries, and if tax treaties exist with fewer than 50 countries.

Foreign Capital Gains Tax

See DITS above. Equals one if there exist any taxes on foreign capital gains.

Other Securities Taxes

See DITS above. Three-point scale: 1, if stamp duty exists, and 2 if additional value-added tax on securities/broking service fees; zero, otherwise.

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