Emerging Markets Research Articles

Dynamic spillover effects and interconnectedness of DeFi assets, commodities, and Islamic stock markets during crises

Decentralized Finance (DeFi) assets, commodities, and Islamic stock market cointegration are affected by technological innovations, market dynamics, investor behavior, and crises. This study investigates the dynamics of returns and volatility for three DeFi assets, six commodities, and three Islamic stock markets from December 2019, to March, 2023, and identifies higher spillover effects during crises. Links among the Cross-DeFi, commodity, and Islamic markets significantly influence returns and volatility during crises. Notably, the commodities index emerged as a pivotal and substantial transmitter of risk during the Russian-Ukraine war crisis, with Emerging Markets (EM) being a key recipient. However, during the COVID-19 pandemic, livestock indices assume the role of prominent risk-return spillover receivers. The findings indicate robust returns and volatility interconnected between DeFi assets and Islamic markets with a moderate level of connectivity among commodity groups. WDI, ACWI, and EM explained 75 % of the variance observed during crisis episodes. This study formulates strategic portfolio management within and between connectedness among return volatilities by highlighting the stability of DeFi assets, the diversification potential in commodities, and a balanced option in Islamic markets. Our study provides a deep and insightful understanding of the stakeholders across markets during crises.

Quantile-frequency connectedness among climate change stocks: The roles of climate change attention and global uncertainties

Concerns regarding climate change and the environment have heightened interest in climate-conscious investing, necessitating a deeper understanding of climate-friendly financial products. This study investigates climate change stock market connectedness and spillover effects, focusing on quantile-frequency dependency. The study utilizes a novel quantile-frequency connectedness with seven MSCI climate change market indices and daily data from January 2014 to December 2022. The empirical analysis reveals that climate change stocks are highly interconnected across various market conditions, including bearish and bullish periods. Spillover effects have amplified during increased stock market turbulence, regardless of market directions. Short-term spillover effects have a stronger impact than long-term effects, regardless of market conditions. Climate change stock markets in Japan and the Asia Pacific consistently experience net shocks, while the United States, Europe, Emerging Markets (EM), North America, and the European Economic and Monetary Union (EMU) exhibit variations based on market conditions and timeframes. The study identifies events including the 2015 Paris Agreement, the 2016 US withdrawal from the Paris Agreement, the COVID-19 pandemic, the 2021 US rejoining of the Paris Agreement, and the 2022 Russian-Ukraine War that have influenced the dynamic connectedness and spillover of climate change markets. The analysis also reveals that increased investor attention to climate change leads to higher interconnectedness among climate change stock markets across various market scenarios. Moreover, global financial stress, economic policy uncertainty, geopolitical risk, global carbon emission futures, oil market uncertainty, and stock market uncertainty significantly impact the interdependence of climate change markets. The findings have implications for portfolio managers, emphasizing the need for hedging techniques to mitigate risks in climate change markets.

Impact of political risk on emerging market risk premiums and risk adjusted returns

Researchers have observed the political risk, sign paradox whereby a decrease in political risk is associated with an increase in stock market returns. This apparent contradiction may be driven by a few political risk factors or perhaps certain emerging market (EM) countries. This paper examines this issue by assessing how key political risk components impact equity risk premiums and risk adjusted returns among EM countries. Using monthly stock market return data for 28 EM countries from 2000 to 2019, we segment countries into high and low political risk groups to explore heterogeneous effects. We find that improvements in political risk increase risk adjusted returns by lowering the volatility of returns. Differences were also found between EM countries with improvements in government stability leading to higher risk adjusted returns among high political risk EM countries. In contrast for low political risk countries, democracy was found to have a negative effect on equity premiums, while law and order and investment profile have a positive impact. Finally, our results suggest key political risk subcomponents, such as investment profile and corruption, impact risk adjusted returns during times of financial crisis.

In the shadow of country risk: asset pricing model of emerging market corporate bonds

We examine the covariances of corporate bonds in emerging markets (EM) and present an asset pricing framework using instrumented principal component analysis (IPCA) that includes characteristics at the sovereign and bond levels. Our results indicate that EM bond returns are significantly influenced by country-specific risks. Incorporating these characteristics can improve both the total and cross-sectional model fit. We demonstrate that a factor framework tailored to the nuances of the EM universe generates a significant alpha of 2% per annum against the market and a higher information ratio than alternative asset pricing models, such as a conditional beta model designed for developed market (DM) bonds.

Digital marketing and small and medium-sized enterprises’ business performance in emerging markets

Purpose This study aims to investigate the comprehensive conceptualization how digital marketing and its adoption increase the productivity of small and medium-sized enterprises (SMEs), as well as the impact of technological orientation, customer relationship management and digital marketing on SMEs’ business performance in emerging markets (EMs). Design/methodology/approach Anchored by social network theory, 178 SMEs were conveniently drawn from the National Board for Small Scale Industries now Ghana enterprise agencies in Ghana. The hypotheses were analysed using the SPSS package tool, and structural equation modelling was used, as well. Findings This study reveals that the conceptualization and adoption of digital marketing positively affect the performance of SMEs’ business management in EMs. In addition, a positive moderating effect of dynamism is observed in the relationship between digital marketing and SMEs’ business performance. Research limitations/implications This study focuses only on SMEs from the Greater Accra and Ashanti regions of Ghana as an EM, and it proposes priorities for future research streams in both developed and emerging countries. Practical implications The findings encourage SMEs to develop quality digital marketing technologies, good customer relationships and technological orientation and customer relationship management competencies in EMs to maximise profit. Originality/value This paper fills considerable knowledge, evidence and contextual gaps in the literature on SMEs, entrepreneurship and marketing in EMs by presenting a comprehensive overview of how SMEs can use digital marketing in an EM context to achieve the following: customer acquisitions, satisfaction and retention; increased profitability; quality service delivery; value creation; and cost reductions.

Digital marketing ecosystems and global market expansion: current state and future research agenda

PurposeThis article aims to provide greater clarity regarding the conceptualization and critical role of digital marketing ecosystems for the global expansion of multinational enterprises (MNEs) and offer novel research directions to prompt future research.Design/methodology/approachThe authors first review the marketing literature related to marketing ecosystems, highlighting the evolution of this body of work across a range of domains such as services, innovation and new product development, communications and marketing strategy more broadly. Next, two case examples of MNEs whose global expansion efforts have been supported by their marketing ecosystems are used to highlight the role of marketing ecosystems in global market expansion. Finally, novel research directions are offered to prompt future research and provide greater insight into this emerging area.FindingsThe case examples we examine yield important insights into the role of marketing ecosystems for MNEs expanding from emerging markets (EMs) to developed markets (DMs). EM-MNEs such as TEMU face more communication and payment ecosystem challenges while opening their supply chain to DMs. Contrary to EM-MNEs, DM-MNEs face institutional and sociocultural challenges that require different marketing ecosystem orchestration approaches.Originality/valueMarketing ecosystems can provide MNEs with greater multinational flexibility, enabling them to adapt their global strategies to navigate increasing complexities in global markets, such as trends toward increased protectionism and geopolitical disruptions. However, there is surprisingly little research addressing this issue.

The performance of emerging markets during the Fed’s easing and tightening cycles: A cross-country resilience analysis

We investigate the determinants of emerging markets performance during five U.S. Federal Reserve monetary tightening and easing cycles during 2004–2023. We study how macroeconomic and institutional conditions of an Emerging Market (EM) at the beginning of a cycle explain EM resilience during each cycle. More specifically, our baseline cross-sectional regressions examine how those conditions affect three measures of resilience, namely bilateral exchange rate against the USD, exchange rate market pressure, and country-specific Morgan Stanley Capital International index (MSCI). We then stack the five cross-sections to build a panel database to investigate potential asymmetry between tightening versus easing cycles. Our evidence indicates that macroeconomic and institutional variables are associated with EM performance, determinants of resilience differ during tightening versus easing cycles, and institutions matter more during difficult times. Our specific findings are largely consistent with economic intuition. For instance, we find that current account balance, international reserves, and inflation are all important determinants of EM resilience.

International macroeconomic vulnerability

Small open economies are known to be impacted by shocks to larger economies. This phenomenon is known as macroeconomic vulnerability. We propose and implement a novel index of macroeconomic vulnerability to foreign shocks for a given pair of a large economy and a small open economy. It uses a structural time-varying Bayesian VAR with a block-exogeneity hypothesis. The index is based on the sum of the responses of the small open economy to shocks in the large economy over time, thus allowing us to disentangle and measure the source of the shock, the impact variables, and the duration of impact. We highlight two results out of the many that our index unveils. First, we do not find a difference between the international impact of U.S. shocks during periods of crises versus stability. Second, we find that there is a growing decouple between emerging markets (EM) and developed markets (DM) on how their domestic inflation is affected by U.S. output shocks. Our approach can also be used to elucidate previously unknown transmission channels or unmeasured theoretical mechanisms. Finally, using a sample of developed and developing countries, we find that global banks do not increase the macroeconomic vulnerability of a country.

Capital Control Taxes in an Emerging Market Economy

Historically, Emerging Markets (EMs) that own foreign debt and exhibit a high degree of dollarization have demonstrated vulnerability to a range of both real and financial shocks. Governments often use a range of capital control measures, particularly in nations burdened with external debt, with the aim of mitigating sudden swings in both inflows and outflows of capital. These policies are implemented to lessen exchange rate volatility and prevent dollarization. This study employs second moments analysis, impulse response functions and the welfare analysis to investigate the impact of a tax policy that restricts international capital flows on several macroeconomic variables in an emerging economy. A dynamic stochastic general equilibrium (DSGE) model is employed to examine the impact of the tax imposed on foreign borrowing on the economy, including both real shocks such as technology and growth, as well as financial shocks such as country risk premium. The findings of the study indicate that capital control taxes have a diminishing effect on the variability of significant macroeconomic variables, such as investment and consumption, when imposed at lower levels. Conversely, these taxes exhibit a stabilizing impact on the volatility of the trade balance-to-output ratio when implemented at higher levels. Moreover, quantitative evidence reveals that country risk premium shocks exert a substantial influence on variations in both the trade balance-to-output ratio and the level of investment, accounting for around 25% and 50% of the fluctuations, respectively. Finally, the existence of such a taxation enhances the intertemporal utility function at the steady state and reduces its volatility in the case of technology and growth shocks.

Neobanks in emerging markets: a risk assessment

Neobanks have risen as popular digital challengers to incumbent banks, especially in emerging markets (EMs) where the banking sector is often characterized by oligopolies. This article first estimates the value of Nubank and StoneCo in Brazil, two of the fastest-growing neobanks in Brazil. Normalizing revenue growth assumptions from their financial data, valuation models uncover that Nubank could be overvalued by about two times, whereas StoneCo could be undervalued by 80% of its fair value, as of March 19, 2024. This article then discusses firm-specific (high cumulative net operating losses, low long-term operating margins, high borrowing costs) and adherent macroeconomic (political uncertainty, foreign exchange risks, high equity risk premia) risks in EMs that explain the volatility in Nubank’s and StoneCo’s stock prices. These risks are instructive for understanding the challenges facing the business model of neobanks in EMs.

The Role of Entrepreneurial Orientation and Entrepreneurial Bricolage on Frugal Innovation and SMEs Sustainable Performance in Emerging Markets

This study sought to investigate the impact of entrepreneurial orientation (EO) and entrepreneurial bricolage (EB) on frugal innovation (FI), and subsequently, the sustainable performance of small and medium-sized enterprises (SMEs) in emerging markets (EMs). Data were collected from 750 key decision-makers in manufacturing small and medium-sized enterprises (SMEs) in the cities of Dar es Salaam and Arusha, Tanzania, yielding a response rate of 51.47%. The data was analyzed using structural equation modeling in SmartPLS software. The results revealed that EO had a positive and significant effect on both FI and EB. Also, EB had a positive and significant effect on FI, which ultimately led to FI positively influencing SMEs’ sustainable performance. Furthermore, the study showed that EO is a strong driver of FI and SMEs’ sustainable performance when mediated by EB and FI, respectively. These findings indicate that firms operating in resource-constrained environments in EMs should emphasize the FI approach in combination with their strategic initiatives, such as EO and EB, to achieve SMEs’ sustainable performance. The theoretical and practical significance of this study is explained thoroughly. The study clarifies how entrepreneurial orientation and bricolage contribute to frugal innovation and the sustainable performance of SMEs in emerging markets. Additionally, it sheds light on a novel perspective regarding the relationship between entrepreneurial orientation, entrepreneurial bricolage, and SMEs’ sustainable performance through frugal innovation. Furthermore, the study provides a new perspective on developing countries such as Tanzania, which lacks empirical evidence on SMEs sustainable performance.

The Role of Entrepreneurial Orientation and Entrepreneurial Bricolage on Frugal Innovation and SMEs Sustainable Performance in Emerging Markets

This study sought to investigate the impact of entrepreneurial orientation (EO) and entrepreneurial bricolage (EB) on frugal innovation (FI), and subsequently, the sustainable performance of small and medium-sized enterprises (SMEs) in emerging markets (EMs). Data were collected from 750 key decision-makers in manufacturing small and medium-sized enterprises (SMEs) in the cities of Dar es Salaam and Arusha, Tanzania, yielding a response rate of 51.47%. The data was analyzed using structural equation modeling in SmartPLS software. The results revealed that EO had a positive and significant effect on both FI and EB. Also, EB had a positive and significant effect on FI, which ultimately led to FI positively influencing SMEs’ sustainable performance. Furthermore, the study showed that EO is a strong driver of FI and SMEs’ sustainable performance when mediated by EB and FI, respectively. These findings indicate that firms operating in resource-constrained environments in EMs should emphasize the FI approach in combination with their strategic initiatives, such as EO and EB, to achieve SMEs’ sustainable performance. The theoretical and practical significance of this study is explained thoroughly. The study clarifies how entrepreneurial orientation and bricolage contribute to frugal innovation and the sustainable performance of SMEs in emerging markets. Additionally, it sheds light on a novel perspective regarding the relationship between entrepreneurial orientation, entrepreneurial bricolage, and SMEs’ sustainable performance through frugal innovation. Furthermore, the study provides a new perspective on developing countries such as Tanzania, which lacks empirical evidence on SMEs sustainable performance.

The relevance of the country and sector effect in global equity returns around COVID-19 and developed and emerging markets

This study explores the historical and current explanatory power of country classification and Global Industry Classification Standard sector classification on global equity returns in the equally weighted MSCI All Country World Index. R2 is a crucial statistical tool for risk and portfolio management professionals because it serves as a measure of how much of a portfolio's movements can be explained by factors. Its significance lies in its ability to quantify how dependent a portfolio's risk is on those factors. The country classification's adjusted R2 is dominant in global equities, driven by its dominance within emerging markets (EM). Within developed markets (DM), the country effect's slight dominance over the sector effect has decreased over time — the two have become more balanced since 2015, with the sector effect having a slightly higher adjusted R2 value. There was a drop in the R2 for all classifications during the COVID-19 pandemic. This drop was most significant in the country classification, with a sharp decline to 8.3 per cent, well below its previous historical minimum of 12 per cent, before it rebounded to its historical range. This change drove further analysis into the country effect across EM and DM, where the large drop and rebound were primarily within EM. During this time, the sector effect dropped but remained within its historical range, implying a larger loss of diversification benefit in country effect than in sector effect. The impact of Chinese stocks on country effect within EM is also investigated. In 2018, there was a large influx of Chinese companies into the index, which caused a decline in country diversification and hence a reduction in explanatory power within EM. China's rapid and strict COVID-19 response, early tight monetary policy and regulatory crackdown have since caused it to become increasingly differentiated from the rest of EM, increasing country diversification within EM and causing the accentuated rebound in explanatory power of the country effect post-COVID-19. Risk managers can use these results to validate the use of sector and country classifications in portfolio construction.

Internationalisation strategy in sport: the case of Flamengo, the largest Brazilian football club

ABSTRACT Research question The present study analyses an emerging market (EM) football club and its internationalisation strategy, seeking to understand its motivations, perceived competitive advantages, strategies and targets. In doing so, we highlight differences from major European clubs’ strategies. Research methods An in-depth case study was conducted with Flamengo, the wealthiest and most popular Brazilian football club. As sources of information, we counted on four formal in-depth interviews; observation, and informal interactions during 123 meetings with different actors; and 1,527 pages of secondary data, all duly coded and triangulated. Results and findings EM clubs’ internationalisation strategies seem to be influenced by their outsider position in the central network of clubs and leagues. Such outsidership influences the advantages they choose to exploit, their strategies, and market selection. Implications This study contributes to filling literature gaps with direct practical implications regarding (1) multi-club ownership, understudied as a mode of internationalisation; (2) the internationalisation process of EM football clubs, to date unexplored; and (3) the comparison of the Latin American/EM club model to the mainstream European club mode of management and internationalisation.

Asymmetric threshold effects of digitization on inflation in emerging markets

This paper analyzes the dynamic asymmetric effects of digitization on domestic inflation for a sample of 54 advanced economies (AEs) and emerging markets (EMs) over the period 2004–2018. Using Katz and Calorda’s Digital Ecosystem Development Index and employing the system Generalized Method of Moments (GMM) estimation methodology, the results of the paper reveal that the improvement in digitization has a statistically significant nonlinear deflationary effect with an exact threshold level of 43.22 points, that is, that the marginal effect of the digital penetration is larger when its level is lower than the threshold level. For EMs, with a level of digitization below the average of our full sample, policymakers must continue to invest in and expand on their digital ecosystem until the threshold level is achieved. Our results show that investment in human capital and improvement in governance can reinforce these deflationary effects. Hence, to obtain the maximum positive impact of increasing digitization on domestic inflation, EM governments should focus on maximizing school enrollment, controlling corruption, establishing rule of law, protecting the right to freedom of opinion and expression, and implementing accountability measures.

Multinational R&D decentralization in emerging markets: subsidiary evolution, autonomy, and influence in global innovation

This study examined how multinational enterprises (MNEs) decentralized research and development (R&D) strategy impacts different evolution paths of R&D centers in emerging markets (EMs). We analyzed the centers' evolution paths in relation to subsidiary autonomy and influence in the MNE's global innovation. We conducted an inductive, in‐depth case study on the Volkswagen Group. We collected data from the headquarters and R&Ds centers of five subsidiaries in EMs. Our study revealed that Volkswagen adopted a decentralized R&D strategy, giving more autonomy to the EMs R&D centers, increasing the subsidiaries' innovation opportunities and their strategic role in the global innovation strategy. We compared two different evolution paths in EMs subsidiary R&D centers. The first path was a traditional one – found in Brazil, Mexico, and the Czech Republic – in which the R&D centers evolved from adapting products from the headquarters to launching innovative products for local markets and, later, becoming a global R&D center. In the second path, observed in China and India subsidiaries, the R&D centers evolved from offshoring units to technology units and finally to global R&D centers. This happened due to EMs' abundance of highly qualified, low‐cost labor and location‐specific technological capabilities. We advanced previous MNE R&D research by explaining how EMs R&D centers with different evolution paths gained more autonomy, increasing their sphere of influence in the multinational's global innovation strategy. We also provided insights on how to manage R&D in EMs.

Modelling financial stress during the COVID-19 pandemic: Prediction and deeper insights

We model the evolutionary patterns of financial stress (FS) for the USA, other advanced economies (OAE), and emerging market (EM) regions during the COVID-19 pandemic. We propose an AI-driven framework to draw meaningful and actionable insights. A set of technical indicators and several allied macroeconomic features are chosen as explanatory variables filtered using the BorutaShap algorithm. We use Uniform Manifold Approximation and Projection (UMAP) based unsupervised feature processing to obtain a better representative structure. The set of engineered features is used to construct a Bidirectional Long Short-Term Memory Network (BLSTM) model to estimate the future values of FS across three regions. The outcome suggests that FS can be predicted during the extremely challenging COVID-19 pandemic, which is vital to evaluate the readiness toward digital transition of conventional financial services. The social media sentiment-based feature is significant for the US and OAE. The macroeconomic construct of WTI crude oil price is substantial for OAE and EM.

Stock market openness and audit fees: evidence from the inclusion of China A-shares in the MSCI emerging markets index

This study examines how China’s stock market openness affects audit fees. In May 2018, Morgan Stanley Capital International (MSCI) announced the first wave of listing of large-cap China A-shares in the MSCI Emerging Markets (EM) Index, which marked China’s grand entrance into the global investment benchmark, and sharply expanded its stock market investor base. Using a difference-in-differences approach, we find that audit fees for constituent stocks decrease after the index inclusion. Further analyses suggest that foreign investors can reduce the risk of expropriation by controlling shareholders and mitigate agency conflicts. Our results also show that the effect is more pronounced for firms with weaker internal controls, lower levels of domestic institutional ownership, and those located in less developed markets. Our findings highlight the monitoring effect of stock market openness in improving corporate governance and advance our understanding of the key drivers of audit fees in emerging markets.

Becoming a Multilatina: strategic capabilities as necessary conditions for the internationalization of Latin American firms

PurposeThis study aims to challenge the generic interpretation of Multilatinas as Latin American firms that have been able to internationalize because of highly competitive strategic capabilities. The authors test whether capabilities that international business researchers commonly associate with internationalization are necessary at different stages of the internationalization process to better understand the extent to which emerging market (EM) firms need to develop them.Design/methodology/approachInternational business research suggests a positive association between strategic capabilities and firm internalization. However, it remains unclear what specific capabilities are necessary and when they are necessary. These questions are particularly important in the context of the internationalization of firms from emerging economies, such as Latin America. The authors apply necessary condition analysis (NCA) on a sample of Latin American firms at different internationalization stages to test what strategic capabilities represent necessary conditions for becoming a Multilatina.FindingsThe findings suggest that only a few strategic capabilities are necessary for Latin American firms to become “Multilatinas”. While entrepreneurial orientation and marketing and sales capabilities represent necessary conditions, EM firms may internationalize even though other capabilities are developed to a lesser extent. The authors reflect on how shifts in local markets and technology drive the emergence of different types of Multilatinas.Research limitations/implicationsMeasuring strategic capabilities across multiple EM firms implies a risk that firm-specific aspects are not fully captured. While the authors focused on the comparative competitive strength of capabilities and took great care to minimize measurement error, the authors acknowledge possible bias. Also, while NCA does not require a minimum sample size, findings from our sample of firms from four countries may not generalize to the region or other EMs.Originality/valueAs a relatively new statistical technique, the use of NCA has spread rapidly. To the best of the authors’ knowledge, the linkage between organizational capabilities and firm internationalization has not been tested from a necessary conditions perspective yet. The reflections on the “Multilatina” concept based on the notion of EM firms as configurations of strategic capabilities inform current debates on EM multinational enterprises.

How to flourish under constraints: imitation or innovation? The mediation role of innovation and absorptive capacity on firm performance

PurposeThe purpose of this study is to simultaneously investigate a comprehensive analysis of the extent to which strategic orientations, namely, imitation and innovation orientations, and knowledge management affect firm performance.Design/methodology/approachDrawing on the theoretical frameworks of the resource-based view and dynamic capability theory, this scholarly inquiry has proposed a comprehensive framework that delineates the relationships amongst imitation, innovation, absorptive capacity (ACAP), innovation performance and financial performance. To scrutinize the proposed research model, bootstrap routines were used through Smart partial least squares to estimate the procedures. To collect the necessary data, a questionnaire and financial statements were acquired from a sample of 100 Iranian firms listed on the Tehran Stock Exchange. The findings of the study have important implications for both scholars and practitioners seeking to enhance firm performance through the effective utilization of imitation, innovation and ACAP.FindingsThe results indicate that imitation activities have directly led to the improvement in innovation performance, even in the presence of innovation and ACAP. However, the relationship has not been confirmed by financial performance.Originality/valueImitation and innovation orientations have been identified as pivotal strategic orientations that can significantly affect firm performance. As far as the authors know, this investigation represents the first comprehensive examination of both imitation and innovation activities as a critical transition in emerging markets (EMs) characterized by complex economies, such as Iran. The findings may aid firms in enhancing their performance by providing insight into the strategic importance of imitation and innovation orientations in EMs.