Financial liberalization and foreign institutional investors: literature review

Gohar G. Stepanyan*

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

1 Citation (Scopus)


Purpose - Examine the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both in the domestic and foreign markets, and their importance in promoting good corporate governance practices worldwide and facilitating increased financial integration. Methodology/approach - Review and synthesize recent academic literature (1970-2011) on the process of international financial integration and the role of foreign institutional investors in the increasingly global financial markets. Findings - Despite the concern that short-term flow of international capital can be destructive to the emerging and developing market economies, academic evidence on a destabilizing effect of foreign investment activity is limited. Institutional investors' systematic preference for stocks of large, well-known, globally visible foreign firms can explain the presence of a home bias in international portfolio investment. Research limitations - Given the breadth of the two literature streams, only representative studies (over 45 published works) are summarized. Social implications - Regulators of emerging markets should first improve domestic institutions, governance, and macroeconomic fundamentals, and then deregulate domestic financial and capital markets to avoid economic and financial crises in the initial stages of liberalization reforms. Originality/value of paper - A useful source of information for graduate students, academics, and practitioners on the importance of foreign institutional investors.
Original languageEnglish
Title of host publicationInstitutional investors in global capital markets
EditorsNarjess Boubakri, Jean Cosset
Number of pages34
ISBN (Print)9781780522425
Publication statusPublished - 2011

Publication series

NameInternational Finance Review
ISSN (Print)1569-3767


  • Cross-border capital flows
  • Foreign institutional investors
  • Global financial markets


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