WHAT MAKES FOREIGN FIRMS ATTRACTIVE TO INVESTORS

Since the start of the new millennium, foreign investment has poured into India and many other emerging market economies from every quarter of the world. Does this mean the end of "home bias"? factors that make foreign stocks attractive are less clear. But the four main explanations favoring home equities -- familiarity, moderate transaction costs, strong legal protections, and transparency - the last factor appears to be the most important. Foreign investment in firms that have overseas listings and good disclosures are higher than other firms.

NBER research suggest that foreign firms can double U.S. holdings of their stock when they cross-list on an U.S. exchange, either in a direct listing or through American Depositary Receipts (ADRs) on any of the American exchange. Foreign capital markets are not just sources of cheap capital, they also help in diversifying shareholder base.


Foreign ownership of traded equity is roughly 40% in Netherlands, Finland, Ireland, Hungary, and Mexico, but less than 10% percent in China, Taiwan, Greece, and Colombia. The foreign ownership in Indain capital market is roughly around 20% or $150bn. The attractiveness of an investment destination for foreign capital depends on the regulatory framework, accounting norms, disclosure levels and corporate governance. With more than 15actively traded ADRs and some 40 other internationally traded securities like FCCBs and GDRs the attractiveness of Indian co's to foreign investors indeed is high which has led some co's in look for foreign shores for their primary listing.