Candidate-centred systems, public banks and equity market restrictions in developing democracies

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Abstract

The pace of financial globalization across the developing world grew rapidly after developing country governments started reducing restrictions on foreign ownership of domestic equities. Studies suggest that the emergence of democracy in developing states played a critical role in facilitating the reduction of controls on foreign investment in domestic equities. Yet, the data reveals that although some developing country democracies have curtailed equity market restrictions, a significant share of developing democracies have increased barriers on foreign ownership of domestic equities. This raises an important question: when do democratic governments in the developing world raise restrictions on foreign ownership of the equities of domestic firms? We suggest that policymakers in candidate-centred developing democracies will increase equity market restrictions in response to pressure from market concentrated public sector banks. Specifically, we claim that highly market concentrated public banks have incentives and the capacity to lobby policymakers to keep the domestic equity market closed to foreign investors. We then argue that policymakers from candidate-centred-but not party-centred-developing democracies have political incentives to be responsive to such pressure, which will induce them to raise barriers on foreign ownership of domestic equities. Statistical results obtained from a comprehensive sample of developing country democracies support our hypothesis.

Original languageEnglish (US)
Pages (from-to)670-709
Number of pages40
JournalReview of International Political Economy
Volume21
Issue number3
DOIs
StatePublished - May 2014

All Science Journal Classification (ASJC) codes

  • Sociology and Political Science
  • Economics and Econometrics
  • Political Science and International Relations

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