SYRIAN BANKING & FINANCIAL SERVICES CONFERENCE SPEECHES

 

Panel Session 4: Stock Exchange and Capital Markets

Presentation:
Professor Colin Mayer
Dean, Wafic Said Business School
Oxford University

 

I want to make three points:

Capital markets are important not just for the financial system, not just for the private sector but also for addressing social and public issues.

The counter argument is that global integration is particularly pronounced in financial markets.  London, New York and Tokyo are international financial centres. That is where finance should be raised. Syria should not be developing its own financial markets.

This counter argument is fundamentally wrong. There is overwhelming evidence that financial markets are critical to economic growth: countries with larger, better-developed financial systems grow faster.

It is particularly important for countries in early and middle stages of development. For example, if Mexico’s bank credit at OECD had been average, then it would have grown 2.6% faster per annum.

The channel through which this happens is investment. Companies and sectors that are particularly dependent on external finance benefit the most from having well developed domestic financial markets. For example in Sweden it was high growth, high tech sectors that benefited from their financial system.

Stock markets play a particularly critical role. There is a close relationship between the size/sophistication of stock markets and entrepreneurial, innovative activities and Research & Development.

The reason is that small, fast growing firms, - the SMEs to which Sir Gavyn Arthur referred yesterday as being the engine of the Syrian economy – are particularly dependent on external finance.  High-tech firms incurring significant initial losses (cash burn) rely almost exclusively on equity finance – private equity from VCs and public equity markets.

This financial development is important for growth and investment. Stock markets are important for younger, innovative firms.

Why do these have to be domestic markets? Why not rely on small firms listing on NASDAQ or AIM? The answer is that equity finance in particular relies on the geographical proximity of investors to firms. Contractual forms of finance such as debt can be undertaken at a distance but equity finance, in particular for smaller firms without strong reputations, requires proximity.

The reason is the importance of trust in financial markets. Even in the presence of sophisticated forms of communication, relationships between investors and firms rely on proximity. There is overwhelming evidence of a preference of investors for investments that are geographically closer to them.

So if firms migrate to NASDAQ or London for their listings so in due course will their headquarters and the control of Syrian companies will no longer reside in Syria.

Does that matter? The answer is yes. While ownership of firms is not critical – and indeed many companies are nowadays internationally owned – the location of headquarters does matter. For example, in the East Asian crisis, foreign owned multinationals cut their investment and employment by more than domestic firms.

What Syria should be seeking to do is to create a vibrant domestic corporate market and associated with that is a vibrant domestic capital market including an equity market, both private equity and a stock market.

What does it take?  It requires good corporate law to promote development of corporations, deregulation to free companies to emerge and good investor protection through informal systems of trust or formal systems of regulation.

It is precisely these ingredients that were associated with the early stages of development of the securities market in developed economies. The introduction of corporate law and the elimination of the government’s monopoly on corporate formation at the end of the 19th century in the UK, Germany, Japan and US was the single most important contributor.

Regulation was weak. Institutions of trust emerged instead: local stock markets in the UK, banks in Germany, business coordinators in Japan.

With strong corporate law, deregulation of corporate activities, institutions of trust and formal regulation of investor protection, I believe that the Syrian economy will be well placed to enjoy the capital market developments that are being observed today and have been observed over a long period in the past.

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