Financial Liberalisation and Economic Development: A Critical Exposition

In developed economies firms have at least three different sources of financing investment: selling new equity, borrowing from the banking system and using retained earnings.1 In developing economies the first option is generally not available because of the absence of a stock market. Even where such a market exists the number of shares traded is very small in relation to the number of firms in the economy whilst the volume of trading is typically very thin. Issuing new equity is, therefore, not a serious option for most firms.