The effects of Trade and Financial Openness and Human Capital on the Protecting Micro Investors in Developing Countries

Purpose: The production sector requires financial investment and high technology. One of the ways to deepen and increase the role of the capital market in financing and providing more attractiveness for the entry of domestic and foreign investors is policy making and adopting procedures for greater support. It is one of the rights of micro investors. Also, due to the increasing trend of globalization and international competition, it has advantages for local companies and can increase capital and market liquidity. But are local corporate governance systems affected by the scale of globalization and international competition?  With the emergence of the knowledge-based economy, the issue of human capital has been considered as an important factor in creating competitive advantage and increasing the value of companies, which can affect the structure of corporate governance. For this purpose, this paper investigates the impact of economic openness (financial and trade) and human capital on the index of support for micro investors in developing countries using the panel GMM method during 2014-2021.
Methodology: In order to analyze the effects of the international competition factors including the trade openness as well as the facilitation of capital inflow and outflow on protecting micro-investors index, the dynamic panel method (GMM SYS) has been used. The system estimator (GMM SYS) is actually an alternative to the GMM first-order difference estimator (GMM DIF). In this method, instrumental variables are used to eliminate endogeneity. Since it is very difficult to find a strong instrument that can cause reliable estimation, DIF and SYS estimators use the instrument available in the collection, i.e. the interval of the endogenous variable. It enters the model as the best instrument. It should be noted that there are two tests to ensure the validity of instrumental variables in GMM-based methods. The first is Sargan's test. In this test, the null hypothesis indicates the non-correlation of the means with the residue. Therefore, rejecting the null hypothesis confirms the validity of the results. Second, the correlation test of the residuals is AR(1) in the first order and AR(2) in the second order. In this test, the disturbance sentences should have first-order serial correlation AR(1) and not second-order serial correlation AR(2).
Findings and discussion: The results showed that the expansion of trade relations as well as facilitating the entry and exit of capital helps to comply more with the standards of protection of micro-investors in developing countries, although the effect of trade openness is stronger. Meanwhile, the role of human capital (investment in human resources) in transferring spillover effects is undeniable. In other words, it can be said that improving corporate governance standards and supporting micro-investors in developing countries are affected by the scale of globalization and international competition (trade and financial), and human capital is important for knowledge transfer and productivity shocks. In addition, the development of the capital market in developing countries significantly reduces the representation problem between managers and micro-investors.
Conclusions and policy implications: Acording to the results, the expansion of trade relations and the facilitation of capital entry and exit have made developing countries more attractive for foreign investors. Thus, domestic companies, to compete with foreign companies, would be motivated towards promotion of corporate governance standards and micro-investor protection. That means, local corporate governance systems are affected by the scale of globalization and international competition. It is noteworthy that exposure to international competition, although it has benefits for local companies and improves corporate governance standards, may create challenges for developing countries that must be addressed through frameworks. In such cases, strong supervision should be done. By facilitating the entry and exit of capital and the expansion of trade relationships, managers may prioritize short-term benefits over long-term sustainability. On the other hand, weak regulatory mechanisms in developing countries may make them unable to keep pace with the complexities of international markets, allowing companies to misbehave and reduce the quality of governance. Examining these challenges can be done in future research. Also, the role of human capital quality (investment in human resources) in transferring the spillover effects of corporate governance and as a moderating factor for the alignment of interests between managers and micro-investors is undeniable, which confirms the strategic policies of human resource management. In addition, governments should improve the stock market environment with strong institutional infrastructure in order to protect micro-investors and, thus, increase the confidence of foreign investors and provide incentives to increase cross-border investments in the host economies.