Favorable Tax Status

Before 1984, US corporations issuing eurobonds were required to withhold for US income tax up to 30 percent of each interest payment to foreigners. This did not encourage foreigners to hold bonds issued by US corporations. Similar tax laws were operational in many countries at that time, and they limited market demand for eurobonds. US laws were revised in 1984 to exempt from any withholding tax foreign holders of bonds issued by US corporations. As a result, US corporations found it feasible for the first time to sell eurobonds directly to foreigners. Repeal of the US laws caused other governments--including those of France, Germany, and Japan--to liberalize their tax laws likewise to avoid outflows of capital from their markets. The consequence was an upsurge in demand for eurobonds from investors who wanted to take advantage of their tax benefits.

The Global Equity Market

Although we have talked about the growth of the global equity market, strictly speaking there is no international equity market in the sense that there are international currency and bond markets. Rather, many countries have their own domestic equity markets in which corporate stock is traded. The largest of these domestic equity markets are to be found in the United States, Britain, Japan, and Germany. Although each domestic equity market is still dominated by investors who are citizens of that country and companies incorporated in that country, developments are internationalizing the world equity market. Investors are investing heavily in foreign equity markets to diversify their portfolios. By 1994, individuals and institutions had invested more than $1.3 trillion in stocks outside their home markets.¹⁹ This figure continued to increase through 1997. Facilitated by deregulation and advances in information technology, this trend seems to be here to stay.

An interesting consequence of the trend toward international equity investment is the internationalization of corporate ownership. Today it is still generally possible to talk about US corporations, British corporations, and Japanese corporations, primarily because the majority of stockholders (owners) of these corporations are of the respective nationality. However, this is changing. Increasingly, US citizens are buying stock in companies incorporated abroad, and foreigners are buying stock in companies incorporated in the United States. Looking into the future, Robert Reich has mused about "the coming irrelevance of corporate nationality."²⁰

A second development internationalizing the world equity market is that companies with historic roots in one nation are broadening their stock ownership by listing their stock in the equity markets of other nations. The reasons are primarily financial. Listing stock on a foreign market is often a prelude to issuing stock in that market to raise capital. The idea is to tap into the liquidity of foreign markets, thereby increasing the funds available for investment and lowering the firm's cost of capital. (The relationship between liquidity and the cost of capital was discussed earlier in the chapter.) Firms also often list their stock on foreign equity markets to facilitate future acquisitions of foreign companies. Other reasons for listing a company's stock on a foreign equity market are that the company's stock and stock options can be used to compensate local management and employees, it satisfies the desire for local ownership, and it increases the company's visibility with local employees, customers, suppliers, and bankers.