Capital Market Imperfections in Emerging Economies

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Capital market imperfection generally refers the capital available at below-market rates for a certain time period and this result in creating disequilibrium in the capital market. Market imperfections in emerging economies such as China may be transformed into ownership advantages (Buckley, 2004) and this may be emerged from a number of interrelated imperfections listed below: 1) State-owned enterprises (SOEs) may have capital possibly in forms of soft budget constraints which made available to them at below the market rates (Warner et al., 2004) 2) Banking systems are inefficient which it allows to make soft loans to potential outward investors (Warner et al., 2004; Antkiewicz and Whalley, 2006). 3) Many Chinese conglomerate firms may operate an inefficient internal capital market and effectively subsidize FDI (Liu, 2005). 4) Family owned firms tend to have easier access to cheap capitals through family members (Child and Pleister, 2003; Erdener and Shapiro, 2005) These imperfections in the capital market may all exist in China. According to Tong (2002), soft budget constraint is regarded as a common phenomenon in socialist economy. It is generally resulted from inefficient operations. Inefficient Chinese firms survive in general and they contribute the soft budget constraints promoted by local government and party officials (Lardy, 1998). Chinese enterprises make acquisitions to enter and penetrate a host economy by using state-sponsored soft budget constraints (Warner
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