Equity and bond issuance is increasingly driving revenue growth and expansion in developing economies, accounting for $4 trillion in new capital over the last three decades, and a 5 percent lift in jobs. 

These are some of the findings presented in a new book from the World Bank Group highlighting how capital markets are accounting for a rising share in the financing of companies in low- and middle-income economies that traditionally rely on bank lending. 

The amount of capital raised from issuing equities and bonds by companies in low- and middle-income countries doubled as a share of gross domestic product between 2000 and 2022, according to the research. 

Deeper capital markets in less developed economies bode well for development. Channeling more private capital to emerging market firms helps them increase investment with a positive knock-on effect on economic growth.  

The research finds that much of the money raised in equity and bond markets was put toward productive activities. In the first year after raising capital, these firms’ investment in physical capital rose 16 percent in low-income countries and 8 percent in middle-income countries, helping drive increases in both employment and revenues.  

Meanwhile, the effect on firm growth varies according to the issuer and the financial instruments used. The impact on growth is particularly strong for new participants in the markets, despite smaller transaction sizes, with the research suggesting that first-time issuances offer greater relief from financial constraints than subsequent ones. 

The effect is twice as strong when capital is raised through the sale of equities in comparison with issuing bonds. This, the authors suggest, may reflect the less restrictive nature of equities in comparison with bonds, which commit the issuer to regular payments. Equity issuances are associated with a 13 percent increase in physical capital, compared with a 5 percent increase in bond issuances. This suggests that firms with high growth potential will gravitate toward equity markets, in part because they offer less burdensome instruments for raising capital. 

The research also found an impact on the wider economy, with firms’ use of capital markets linked to increases in countries’ employment levels as well as their total stock of physical capital, or property, plant, and equipment. 

In low-income countries, firm issuance activity accounted for 21 percent of the growth in physical capital and 12 percent of the growth in employment among publicly listed firms between 2000 and 2022. In middle-income countries, these estimates are 22 percent and 20 percent, respectively. 

The evidence presented in the book shows that moving to a prefunded pension system increased the pools of available domestic capital.

Low- and middle-income countries that carried out such reforms between 1990 and 2022 saw domestic capital raising on bond and equity markets increase by five times as a share of GDP in the four years following the reforms. This growth for domestic fundraising far outstripped any rise in the role of international capital.

More broadly, the analysis suggests that developing domestic bond and equity markets helps local investors fund the expansion of financially constrained firms in less developed economies, directing more funding to the most productive firms and benefitting the economy overall. 

Part of the IFC Research Series, the publication was made possible through financial support from the Ministry of Finance of Luxembourg through the World Bank Group’s Joint Capital Markets Program (J-CAP).