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영어

This paper reviews major studies accumulated over the last two decades in finance literature on the impacts and roles of foreign portfolio investors in emerging markets, and more specifically, reviews the studies on Korea in detail. The Korean economy successfully overcame two financial crises in 1997 and 2008, and stands out as the 15th largest economy in the world based on GDP in 2009, with foreign equity ownership composing about 40% of total market capitalization. Such growth of the Korean economy could be partly due to the benefits of capital market liberalization policies conducted since 1992. In fact, the literature provides generally positive evidence of the benefits gained after liberalization through a reduction in the cost of capital, increased economic growth, and better corporate governance; however, it provides very little consensus on the destabilizing effect of foreign capital flows. In reality, Korea experienced a severe credit crunch until early 2009 due to massive capital outflows during the global financial crisis, despite the Korean economy’s sound corporate performance and ample foreign currency reserves. Hot money flowing into the Korean bond and stock markets reached 40 trillion won by the end of 2010, which require Korea to take steps to control a potential sudden outflow of these funds and further capital in flows. This aspect of foreign capital flows is potentially damaging for emerging markets and may substantially weaken the benefits of opening capital markets. Regarding the issue of the information advantage between domestic vs. foreign investors, the empirical evidence in the literature is mixed and varies across studies, depending on the specific markets or countries examined and the specific methods or horizons employed for the comparison of investment performances across different types of investors. More comprehensive analysis in this area would be desirable.