The pricing of country funds and their role in capital mobilization for emerging economies

The authors theoretically analyze country funds, focusing on emerging economies in which capital markets are not readily accessible to outside investors. They study country-fund pricing and the associated policy implications under alternative variations on segmentation of international markets. They show that country funds traded in the developed capital markets can help promote the efficiency of pricing in the emerging capital markets and can enhance capital mobilization by local firms. These efficiency gains vary depending on the degree of the international investor's access to the emerging market securities (access effect), on the degree to which the industrialized countries'securities market span the securities offered in the emerging markets (substitution effect), and on the existing cross-border arbitrage restrictions. As a byproduct of their analysis, the authors study the reasons why country funds sell at a premium or discount relative to their net underlying asset value. They also show that the efficiency gains that arise with the development of new funds can be positive even when these funds start trading at a discount. They conclude with a catalog of policy implications, including strategies for efficiently promoting country funds. For example : in general, introducing the country fund in the advanced or developed market increases the prices of the underlying component assets traded in the originating emerging markets; as a policy matter, country funds that should be encouraged by emerging countries for introduction by fund promoters should be targeted to those local assets with imperfect or no substitutes in the advanced core markets; and in some circumstances, it may be socially optimal to subsidize the introduction of new funds that are expected to sell at a discount.