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Best Markets For Entrepreneurial Finance

Glenn Yago

A constant in the world of business is the need for external financing. Both new and existing firms need access to capital to finance new ideas, bring new products to market, and create jobs. The hopes and dreams of investors and workers as both producers and consumers in a global economy depend upon efficient and lowcost, long-term high-return capital markets and financial institutions.

The Milken Institute Capital Access Index evaluates the ability of firms in 121 countries – representing 92 percent of global GDP – to do just that. It measures the ability of companies around the world to access the financial technologies and innovations necessary for economic growth. The Index also examines the robustness of capital markets, the existence of alternative sources of capital, and access to international funds in each country.

The 2005 Index ranks the United Kingdom as the No. 1 country in the world for capital access, followed by Hong Kong, Singapore, and the United States. The United Kingdom rose to the top primarily because of its vibrant equity market. Over the past few years, the London Stock Exchange experienced lower volatility and expanded its listings. Its institutional environment, including the efficiency of contract enforcement, property rights, and bankruptcy procedures, remained the best in the world. It still lags relatively, however, in venture risk capital and other financial innovations, but its dynamic capital market compensated for some of these deficiencies.

But in addition to revealing the top and bottom performers, the Index shows how small, open economies like New Zealand, Singapore, Estonia, and Ireland have improved their competitive positions and succeeded in both attracting foreign capital and channeling domestic savings into investments, while countries like Thailand, Indonesia, and the Philippines still struggle to emerge from the financial crises of the late 1990s.

The Index also shows that many countries in Asia have made tremendous progress in developing relatively efficient financial systems. One note of caution, however, is their markets remain imperfect and the risks associated with a continued lack of financial innovation in those markets endanger their ability to weather future financial crises. More development is required in Asia’s debt capital markets to finance growth and stability to manage more complex and flexible firm capital structures.

Other notable results from this year’s Capital Access Index: Latin America has continued to disappoint expectations and still lags much of the rest of the world in its ability to employ local savings and foreign capital for investment.

By contrast, the transition economies of Central and Eastern Europe have taken some of the most rapid steps to modernize their financial infrastructure. Indeed, many of the core European Union member states have recently looked to these small transition economies as examples of reform. The Czech Republic, Slovakia, Poland, Croatia, and even the Ukraine experienced marked improvements in their transparency, regulatory, and financial innovations over the past year, bringing more liquidity and growth to their capital markets. One fiscal policy example is the new- found enthusiasm for flat taxes, which has spread from Eastern Europe to Western Europe. During the recent German election, a leading advisor to new German chancellor Angela Merkel proposed a flat tax.

Africa as a region has the lowest capital access score in the world, claiming 17 of the bottom 20 countries in the Index. This is mainly due to few countries’ having equity markets and almost none having bond or alternative sources of capital.

In contrast, low tax rates combined with capital market development have improved the overall outlook for many Middle Eastern countries such as Saudi Arabia, Kuwait, Oman, the United Arab Emirates, and Jordan.

The two major emerging economies, China and India, increasingly diverge in their capital access policies. China rose five places to 38th in the Index with improvements in their banking regulation, treatment of nonperforming loans, and expanded emphasis on capital market developments, while India dropped two places to 53rd in the rankings. Chinese businesses are increasingly able to tap capital from domestic equity and bond markets, as well as the global market. Both domestic stock capitalization and private bond outstanding measures continued to rise over the past year. The private placement market as a percent of GDP increased forty-five fold. In contrast, listing in the Indian stock market declined by 16 percent, and that market’s volatility increased over the past year.

One innovative and important source of capital is securitization – the issuing of securities backed by cash flows from a pool of underlying assets, such as mortgages, leases, credit-card receivables, and even intellectual property. This year, the Capital Access Index takes an in-depth look at this type of financing, which has become pervasive with $4.7 trillion of global issuance last year – greater than all equity issuance.

Securitization has become a valuable tool for firms and institutions to move assets off their balance sheets and for the financial system to spread risks more broadly. By moving illiquid assets from a firm’s or bank’s balance sheet, securitization not only increases liquidity, but also allows for better management of risks and returns through diversification. The key macroeconomic benefit is the lowering of costs of funds for business expansions and start-ups. Moreover, evidence abounds that securitization lessens the depth of businesscycle downturns and associated credit crunches that hurt small and mediumsized businesses, thereby amplifying the financial accelerator for national economies.

The Capital Access Index illustrates a positive lesson from globalization for established and emerging economies—- the ability to compete for global finance to fund both business expansion and a bridge to a global middle class depends increasingly upon programs and policies that enable both local and international investors to rely upon transparent, efficient, long-term, and lower cost capital markets and financial institutions

Additional information:
The Capital Access Index is available online at

Glenn Yago is director of capital studies at the Milken Institute, a nonprofit, independent economic think tank whose mission is to improve the lives and economic conditions of diverse populations around the world. It is based in Santa Monica, California.

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