[Research Contribution] The Impact of Capital Market Development on Economic Growth in ASEAN Countries and Policy Implications for Vietnam

8 Tháng Ba, 2025

Keywords: ASEAN, capital market, economic growth

The capital market plays an essential role in the national economy in general and in economic growth in particular. Through the study “The Impact of Capital Market Development on Economic Growth in ASEAN Countries,” the author empirically assessed the impact of capital market development on economic growth in ASEAN countries during the period 2013–2023. Based on these findings, the study proposes solutions aimed at enhancing the operational efficiency of capital markets in connection with economic growth in ASEAN countries, with particular emphasis on Vietnam in the coming period.

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Research Context

Capital has always been one of the most critical factors for the development and economic growth of any economy. Much like monetary markets, capital markets are equally important. A dynamic and prominent capital market will stimulate production and enhance productivity in the national economy, because when funds can access the capital market over an extended period, the financial requirements of business operators will be met.

Meanwhile, the stock market constitutes a vital component of the capital market. A number of economists have emphasized that the development of the stock market has a positive impact and serves as a crucial factor for economic development. The study by Ngare et al. (2014) on the role of stock market development in economic growth in Africa during the period 1980–2010, covering 36 countries – 18 of which had stock markets – uncovered several key findings: (i) countries with stock markets tended to grow faster than those without stock markets, and (ii) countries with higher levels of development and established stock markets tended to grow faster than smaller countries with stock markets. Additionally, the study by Naik & Padhi (2015) on the linkage between stock market development and economic growth across 27 emerging market economies during the period 1995–2012 also concluded that stock market development contributes significantly and positively to economic development.

Individual ASEAN capital markets are small in scale, limited in the scope of products and services, relatively illiquid, and burdened with high transaction costs due to fragmented trading volumes. Therefore, cooperation among the stock markets of these countries is essential so that all may benefit and to foster the development of stock markets across the region. At the regional ASEAN level, the formation of a common capital market would enhance the global competitiveness of ASEAN markets relative to other regions, while simultaneously accelerating the integration of less-developed capital markets within the region toward a common standard.

ASEAN comprises 11 countries and is regarded as a region with a dynamic and growing economy. In particular, several emerging stock markets in certain countries within this region play a significant role in the economic development of those nations. However, research on the influence of stock market development on economic growth in this region remains relatively scarce. Therefore, the study “The Impact of Capital Market Development on Economic Growth in ASEAN Countries” was undertaken with the aim of clarifying the impact of the capital market – particularly the stock market – on the economic growth of countries within the region.

Capital Markets and Economic Growth

The capital market is where medium- and long-term securities are issued and traded, including debt instruments and equity instruments with maturities greater than one year. The capital market encompasses investors as well as securities issuers – namely governments and enterprises – that primarily issue debt instruments and equity. The capital market is an important component of the financial market, subject to government regulation to ensure efficient and sound market operations.

Economic growth refers to the long-term increase in per capita output or output per worker. According to North & Thomas (1973), economic growth occurs only when output increases faster than population growth. According to the classical economics school of Adam Smith and David Ricardo (1817), labor is the source of value creation for society and is considered the determining factor of economic growth. Agriculture was regarded as the most important economic sector, with the fundamental factors of economic growth being land, labor, and capital. Economic growth is typically measured by the growth rate of gross domestic product (GDP) or gross national product (GNP) within a year. Economic growth takes two forms: first, extensive growth through the use of more resources such as physical materials, labor, and natural capital; second, intensive growth through the more efficient use of existing resources. Under the first form, if economic growth is based on increasing labor, a large increase in the labor force not only fails to raise per capita income but also leads to greater resource consumption, thereby affecting the ecological environment and ultimately depleting national resources. However, if economic growth follows the second form – that is, making more efficient use of resources such as labor and capital – the result is an increase in average per capita income, along with improvements in the quality of the population’s living environment.

The Role of Capital Development in Economic Growth

The capital market plays a crucial role in the economy, primarily manifested through the encouragement of investment by providing the means and mechanisms for buyers and sellers of securities to conduct transactions. These investments enable enterprises to raise capital for business development and production expansion. Capital mobilization by enterprises takes place in the primary market, while the secondary market primarily provides liquidity for securities. The capital market offers an additional investment channel for savers. It also provides investors with the ability to diversify their investment portfolios to mitigate investment risk. With a variety of available securities, the capital market becomes particularly important for investors when alternative investments such as savings deposits or treasury bills offer low interest rates. Consequently, the capital market promotes savings and capital mobilization. If the secondary market functions well, investors will obtain investments with higher liquidity and better returns compared to investing in gold or real estate. Furthermore, the capital market also provides effective risk-sharing and risk management capabilities. The capital market allows investors to share the risks of high-risk, high-return projects and enables these projects to be realized. Without this risk-sharing and risk management mechanism, high-return, high-risk projects would not be implemented, and as a result, no new value would be created for the economy. The capital market thus promotes the enhancement of capital efficiency.

The study by Atje & Jovanovic (1993), examining a group of 40 countries during the 1980s, revealed a strong correlation between stock market trading and economic growth. Using the model of Atje & Jovanovic (1993), Murinde (1996) found a positive relationship between capital market development and the rate of economic growth in Asia–Pacific countries. Another study by Levine (1999) demonstrated that the stock market contributes positively to economic growth. Moreover, these authors found no negative evidence of stock market volatility or stock market integration on economic growth. Other empirical studies have also shown that the development of financial markets, including capital markets, contributes positively to corporate performance.

Factors Influencing Economic Growth

First, the labor force is one of the factors affecting economic growth. According to the neoclassical growth theory of Solow (1956), the labor force has an impact on economic growth. An increase in the labor force raises output; however, when the labor force grows beyond a certain threshold, it leads to a decline in per capita output.

Second, trade openness has an impact on economic growth. Trade openness refers to the relative size of the foreign trade sector within an economy, measured by the ratio of total import–export turnover to GDP. Enhancing the quality of openness across the entire economy facilitates the absorption of scientific and technological know-how, management expertise, and the attraction of foreign investment.

Third, inflation is a matter of significant concern in many countries. Previous studies have shown that inflation affects economic growth, with economists generally agreeing that high inflation rates negatively impact economic growth, as evidenced by findings on the adverse effects of high inflation on economic growth in recent studies. According to the research of Khan & Senhadji (2001), both developing and industrialized countries have an inflation threshold beyond which inflation has a negative impact on the economy; specifically, the inflation threshold for developing countries is 11–12% per year, while for industrialized countries, it is approximately 1–3% per year.

Fourth, to a certain extent, infrastructure is a factor that indirectly influences national economic growth. Infrastructure represents the aggregate of production relations that constitute the economic structure of a given society and is considered a variable that impacts economic growth.

Policy Implications

Based on the key findings of the study, the author proposes recommendations aimed at promoting economic growth in ASEAN countries through increasing the total stock value on exchanges and the market capitalization.

First, diversify securities products, investment-linked products, and structured products; deploy derivative securities products such as futures contracts on new indices and government bond futures contracts; implement covered warrants; and develop additional benchmark indices to serve as underlying assets for derivatives.

Second, develop and diversify the investor base and improve demand by continuing to implement solutions for upgrading the stock markets of countries within the region.

Third, develop and strengthen the capacity of the market intermediary system by continuing to restructure securities business organizations to reduce their number while enhancing service quality.

Fourth, encourage the operations of underdeveloped stock exchanges in countries within the region through cooperation and the sharing of management experience.

Fifth, focus on solutions such as increasing the investment scale for investors across countries by increasing the number of large-capitalization companies, and promoting and facilitating capital mobilization for enterprises.

For the Vietnamese market, in order to develop the capital market, it is necessary in the future to increase the supply of goods for the capital market in both breadth and depth: diversifying the types of listed securities while increasing the quantity of each category of goods on the market. Regarding goods on the equity market, solutions that should be implemented include continuing to increase both the quantity and quality of stocks listed on the centralized market. There are two sources of goods that can supply this solution: (1) shares of state-owned enterprises undergoing equitization, and (2) shares of joint-stock companies, joint ventures, and wholly foreign-owned companies operating in Vietnam.

To develop goods for the capital market, the foreign investor ownership limit on shares of joint ventures and wholly foreign-owned companies in sectors not prohibited by law may be removed. In addition, relaxing the issuance of supplementary shares and bonds for listed companies is necessary. Adopting a registration mechanism for the issuance of new shares offers the following advantages: (i) shortening the time required to prepare issuance documents and capitalizing on capital mobilization opportunities; (ii) reducing the burden of issuance licensing activities; and (iii) lowering the costs of regular share issuance.

Furthermore, Vietnam also needs to strengthen the integration of its domestic capital market with the international capital market. The process of integrating the domestic and international capital markets is an inevitable process accompanying Vietnam’s accession to the WTO and ASEAN, at which point commitments regarding cooperation and the opening of capital markets to external partners and investors must be fulfilled. The guiding principle of capital market integration solutions is to promote a sustainably developed capital market, to advance the process of capital mobilization and investment in international markets in order to help enterprises and investors gain better access to the international market, to diversify investment portfolios, and to strengthen the capacity and competitiveness of the domestic capital market. To achieve this, the Government and relevant ministries and agencies must make greater efforts in perfecting the management and operational mechanisms of the market, regulations on supervision, and administrative penalties in the securities sector – for example, by improving the information disclosure activities of entities in the capital market to ensure transparency in transactions, which in the long term will attract safe and sustainable capital flows.

Author: MSc. Nguyen Hoang Nam – UEH College of Economics, Law and Government, University of Economics Ho Chi Minh City (UEH).

This article is part of the Series on Research Dissemination and Applied Knowledge from UEH, carrying the message “Research Contribution For All”. UEH cordially invites readers to follow the next edition of UEH Research Insights.

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Content and images: Author, UEH Department of Communications and Partnerships

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