You’re probably aware of the advantages
diversification
offers for your investment portfolio. The same principles hold true for companies when they’re raising funds: There are benefits to using a combination of methods. A company might take a loan when starting up, or work with venture capitalists that invest in the company. Several years later they may go public by issuing stock to expand into new markets, and then issue bonds at some time after that to cover the cost of upgrading equipment.
The availability of several methods to raise funds is appealing to companies because it means they can continue to tap new sources of money over time. And by choosing several ways to raise funds, it’s possible to balance the advantages and disadvantages of each method. For example, a
publicly held company
may issue
bonds
to raise additional funds because issuing more
stock
would dilute the value of existing stock, upsetting current
shareholders.
Going global
Companies can also look to international capital markets. Some countries may offer better opportunities for raising capital than others, since there may be more potential investors in one country than in another. For example, a company in a small or developing nation might face a limited domestic capital market, so it could choose to offer shares to the much larger pool of investors through
American Depositary Receipts (ADRs)
traded in the United States, or Global Depositary Receipts (GDRs) traded in markets around the world.
On the other hand, a European company might raise capital internationally by issuing bonds in a country with lower interest rates than it might have to pay at home, reducing the costs of raising that capital.
Professor Samuel L. Hayes,
Harvard Business
School
Professor Samuel Hayes discusses how international capital markets are important for developing countries.
For most developing countries, access to international capital is essential to a robust rate of economic growth. That’s because unless capital is available to produce marketable goods and services and to provide working capital to finance business transactions, business — and country — growth is stymied.
When investors put capital into developing markets, they usually provide management and financial expertise as well. That has a positive effect on growth.
There are many examples of countries whose economies withered when outside capital was cut off.
The availability of several methods to raise funds is appealing to companies because it means they can continue to tap new sources of money over time. And by choosing several ways to raise funds, it’s possible to balance the advantages and disadvantages of each method. For example, a
Professor 