Question

Assuming that the business in Mexico grows, explain how financial markets could help to finance the growth of the business.

Answer 1

Financial markets play a very critical role in the growth of businesses in either a developing or developed economy.

A financial market is a market place where investors meet their match i.e. the borrowers. The financial intermediaries like Banks, Investment Banks, Insurance companies, Pension funds and Mutual funds play an important role in facilitating the process through financial instruments like stocks,bonds, derivaties, etc. The investor is always on the look out for a borrower who can provide the highest risk adjusted returns. A financial intermediary like bank pools savings from investors, insurance company collects premiums, a pension plan parks aside the funds for future, etc. The funds so collected by the financial intermediary is then lent to different projects on varying scales. Even companies keep investing from time to time for short term.

A transparent and efficent financial market accelerates the growth story of an economy. It is also important that there is political stability, rule of law and property rights. This is the reason why growth picks up at a faster rate in developed economies like United States than in developing economies. A financial market mirrors the state of the economy. It not only connects the domestic investors but also the international investors with the businesses in need of money.

Mexico is still not a developed economy but it positions itself successfully as the 15th largest economy in the world with a 2 trillion GDP. Some economists do categorize Mexican economy as a developed one.

Assuming the business in Mexico grows, financial markets can contribute significantly to the growth of the economy by financing the projects that are truly growth driven. Financial markets also help in better currency management which in turn will contribute to the growing imports and exports. It will also attract international investors. Growth always needs support and this can be achieved only through confident investors and borrowers. This confidence can only be given by the country's financial markets.