Stock Market Liberalizations and Export Dynamics

Abstract

We find that granting foreign investors access to domestic stock markets facilitate efficiency-enhancing product specialization in the recipient countries. After countries liberalize their stock markets and allow foreign investors to acquire equity stakes in domestic firms, products that do not correspond to the liberalizing countries' comparative advantage disappear disproportionately faster from their export portfolios. At the same time, the overall long-term export performance of the liberalizing countries improves. Domestic stock market development does not play the same disciplining role in forcing termination of inefficient exports, suggesting a unique role for foreign investors in improving resource allocation in the real economy.