Financial innovations and the dynamics of emerging capital markets

National capital markets can be positioned along a continuum ranging from embryonic to mature and emerged markets according to a decreasing 'national cost of capital' criterion. Newly emerging countries are handicapped by a high cost of capital because of 'incomplete' and inefficient financial markets. As capital markets graduate to higher level of 'emergedness', their national firms avail themselves of a lower cost of capital that makes them more competitive in the global economy and spurs economic growth. This chapter argues that the dynamics of emerging markets are driven by: 1) the skillful transfer of financial innovations to emerging markets committed to deregulating their financial sector, 2) disintermediation of traditional financial intermediaries (mostly commercial banks) in favor of a more cost effective commercial paper market, and 3) securitization of consumer finance which reduces households' cost of living.