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Jumat, 17 Januari 2020 16:41:00

CUHK Business School Research Reveals Strong Link Between Stock Market Liberalisation in Emerging Markets and Increased Innovation

HONG KONG, - 17 January 2020 - There is little doubt that the liberalisation of stock markets in emerging markets has been a positive force in the world economic order. One previous study has found that stock market liberalisation leads to a 1 percent increase in a country's annual real GDP growth.

Closer to home, economic reforms in modern China have been hailed as a success leading to the Asian behemoth's rise as a world power.

What is less well understood is how the government removal of restrictions on foreign investors' participation in domestic stock markets promotes economic activity. This is a question posed by a group of researchers, who believe the answer lies in the positive effect of economic reforms on innovation.

One theory has been that stock market liberalisation allows risk to be shared among a greater number of market participants -- and thereby reducing the cost of capital for firms. The problem with that, according to Prof. Wenrui Zhang, Assistant Professor of Department of Finance at The Chinese University of Hong Kong (CUHK) Business School and Prof. Bohui Zhang, Executive Associate Dean and Presidential Chair Professor at CUHK-Shenzhen's School of Management and Economics, is that it fails to explain the magnitude of the benefit.

There has also been a lack of empirical research looking at how innovation -- which tends to involve long-term investment in risky and intangible assets -- works to increase productivity in the wake of the opening up of markets.

"While some studies show that stock market liberalisation leads to an increase in capital expenditure, it is unclear ex ante how stock market liberalisation affects a country's innovative activities," Prof. Wenrui Zhang said. (*).