Which country attributes are important?

IMF Study - While experts agree that domestic stock market development is strongly linked with country (macroeconomic) influences—such as GDP, inflation, and trade openness—these variables also relate to firms' activity in global equity markets in several ways.

One view holds that worse domestic macroeconomic conditions increase the need and desire of firms to tap international markets. Poor domestic markets have long been considered a key reason for capital flight and for greater use by all types of domestic residents and firms of international capital markets. Furthermore, global equity markets offer firms from countries with weak institutional frameworks and lower levels of law and order the ability to "bond" to systems that better protect investor rights.

Another view holds that better domestic environments can increase the attractiveness of firms to investors, especially foreign ones. Investors able to invest globally will generally offer larger amounts of external financing and lower cost as firms' host country fundamentals improve. Thus, better domestic fundamentals lead to more use of international capital markets under this view.

In an empirical analysis, it is hard to pin down the relative importance of these two views—that is, the relative role of demand- and supply-side factors that make (and allow) corporations to use global capital markets. But the study confirms that firms in countries with larger economies, higher income levels, greater trade and financial openness, and better macroeconomic fundamentals—but worse institutional environments—tend to use global equity markets more.