has been the internationalization of financial services, which has meant the use of international financial intermediaries by issuers and investors from emerging economies. Latin firms have actively participated in this process by listing in foreign exchanges and issuing depositary receipts.<sup>24</sup> In fact, the internationalization of equity issuance and trading in Latin America is significantly higher than in other regions (Figure 7). In many Latin countries, activity abroad now exceeds activity in local exchanges. Even domestic investors have started trading stocks from their own countries in the more liquid and less costly international markets, bypassing local exchanges. This is easy to achieve in a world where trading can be done electronically from anywhere. In addition to the growing migration and delistings, domestic equity markets in the region are highly concentrated, with only a few stocks dominating market capitalization and trading (Figure 8). Moreover, these markets remain illiquid, in part as a result of very low “float” ratios (a low proportion of listed shares available for trading).

These outcomes do not imply that reforms have been ineffective or should not be undertaken. They do mean, however, that the expectations associated with reforms should be revised and that a fresh look at the reform agenda is needed. In effect, recent empirical work shows that improvements in macroeconomic and institutional fundaments, as well capital market-related reforms, have had a pro-internationalization bias. While these factors have indeed promoted local stock market development, they have spurred even more the internationalization of stock issuance and trading (Claessens, Klingebiel, and Schmukler, 2006; De la Torre, Gozzi, and Schmukler, 2005). There is, in addition, interesting empirical research that suggests that the below-expectations development of local stock markets is not independent of their internationalization—as the migration of stock issuance and trading abroad has been found to have had an adverse effect on the trading and liquidity of local markets (Levine and Schmukler, 2006a,b).

To be sure, the reformers of the 1990s were not dismissive of the globalization process; they rather supported it. But they tended to expect that the effect of reforms would be to attract foreign investors and global liquidity to their domestic markets. They did not anticipate that the fruit of their efforts would be an increased tendency for the best equity regional comparison of stock listings data over the last decade shows that, in contrasts with the delistings in Latin markets, stock markets in East Asia have been recording a strong listings increase. Different explanations have been put forward to explain these diverging trends. On explanation is that, unlike the American and European stock markets, which performed well over the 1990s, stock markets in Hong Kong and Tokyo, the natural candidates for migration in Asia, have not done well in recent years (World Bank, 2004).

24 There are different ways to “list” domestic stocks in international financial markets. A traditional way is to cross-list the share in another exchange. European companies tend to use this method of internationalization most often. A popular way to internationalize among emerging market firms has been through depositary receipts (DRs), called American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs). These are foreign currency denominated derivative instruments, issued by international banks, representing home securities held with a local custodian. ADR trading in U.S. exchanges has expanded from UDS$75 billion in 1990 to one trillion in 2005, and there are currently more than 1,900 sponsored ADR programs issued by firms from 73 countries. DR programs grow or shrink depending on demand, since the issuance of DRs and the conversion back to the underlying shares only involves a small transaction cost. See Levy Yeyati, Schmukler, and van Horen (2006).

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