What Is an Emerging Capital Market?

Emerging capital market describes the market of a developing nation that is building its economy, and thus creating new capital opportunities for the global market. Characteristic to emerging capital markets is notably a commitment to development and reforms, with the intent on merging with the global economic structure. Usually, the economies of these markets are experiencing rapid growth, thereby creating capital markets that afford access to financial capital in order to continually maintain that growth. Transitional in nature, these markets implement consistent reform measures to achieve accountability, laying the groundwork for merging with the global economy, rather than adhering to or reverting to a closed economic framework. Creation of an emerging capital market is thereby an inherent process to solicit and retain both local and overseas investment.

Noticeable increases in both transparency in economic structure and efficiency in economic processes are important signals of an emerging capital market. Accountability is crucial to attract needed investors, in particular foreign investors, but also to build the confidence of local investors. Nations committed to forming such a market and merging with the global economy deliberately create an environment conducive to responsible economics, and in the process establish an economy based on a solid, foundational framework. Various reform measures are implemented in capital markets to help ensure these objectives.

Capital flight, wherein local investors choose to invest overseas rather than locally, is a critical concern in a developing economy. In order to mitigate such risks, reform measures might include exchange rate measures that strongly favor local investment. Once such measures are in place, along with reforms that help assure accountability, local investors are much more likely to invest in the economy locally, rather than abroad. As the local economy gains traction and significant investment, foreign investors usually take notice and follow suit, helping to establish the emerging capital market. Such measures also serve to solidify a robust local currency that offers stability once foreign investors begin to consider shifting capital to the emerging economy.

Many potential emerging capital markets also rely on aid and expertise from larger nations or developed economies in order to gain traction, implement the right reforms, and position the economy to take advantage of foreign investment. Doing so signals the nation’s commitment to transparency in its economic agendas. Once they have gained the confidence of local of foreign investors, developing nations then serve as a hub for foreign firms seeking expansion opportunities. Attraction of capital resources from foreign investors enables the developing nation to reinvest in both infrastructure and in its capital markets, thereby attracting more investment and sustaining high economic growth until the economic divide is closed between the developing nation and nations already developed.