Emerging Markets Research Articles

(Systematic) Investing in Emerging Market Debt

We extend the analysis of systematic investment approaches to emerging market (EM) fixed income. We focus on hard currency bonds issued by emerging sovereign and quasi-sovereign entities. We find that systematic exposures linked to carry, defensive, momentum and valuation themes are well compensated and lowly correlated in EM markets. A transaction-cost and liquidity aware long-only portfolio generates an Information Ratio above 1. We further show that excess of benchmark returns for a broad set of EM managers are (i) largely explained by passive exposures to EM corporate credit excess returns and EM local currency returns, and (ii) have non-trivial macroeconomic exposures (growth, inflation, volatility and liquidity). A systematic approach to EM debt may be a powerful diversifier.

신흥시장에서의 리버스 이노베이션 -혁신확산모형과 중국시장 사례연구-

Reverse Innovation has been a newly emerging concept of innovation for last ten years. It implies that new technology or new knowledge flows from low income countries to high income countries. This concept of reverse innovation contradicts the conventional wisdom of innovation paradigm. The conventional wisdom implies that most of technological innovation has been created within research centers located at advanced countries. Our contribution is that this paper suggests an innovation- diffusion model of reverse innovation. We divide total diffusion of reverse innovation into four sub-parts: first, identification of the problem, second, innovation in low income country, third, innovation transfer from low income country to high income country, and fourth, innovation and diffusion in high income country. We also implements a case study of China in the area of reverse innovation. Our finding show that eleven cases of reverse innovation are identified in China. Accordingly, we conclude that China is one of the Emerging Market(EM) that implements a reverse innovation. One of implications of this study is that it is necessary to intensify cooperation between high income country and low income country, since executives of headquarter of multi-national corporation(MNC) located at high income countries need to understand cultures of low income country to sell their products to low income countries. At the same time, low income country needs to cooperate with the headquarter of multi-national corporation(MNC) in high income country in order to re-export their frugal products to high income countries.

Advanced and Emergent Equity Market Behaviour

The drive of this work is to observe the bidirectional association in a section of advanced and emergent equity market places at diverse points of time. For the study purpose top ten Advanced and emergent markets are taken into consideration. Daily closing prices of these markets’ representative index were taken over a period of twenty-three years. Granger Causality Test was applid after checking the assumption of causality. An existence of bidirectional relational was established for nations. VAR test was also applied further to estimate the causality in the short term.

Does innovation and financial constraints affect the propensity to save in emerging markets?

Despite the surge in corporate savings and heightened interest in understanding the reasons for this behaviour, little is known about the forces behind this stylised phenomenon in emerging markets (EMs). Using a large sample of firms from nine African countries over the period 2001–2015, we posit and find that the propensity to save is higher in this context due to limited access to external finance. However, when we examine the effects of innovation on corporate savings, we find that the results are reversed as, relative to Non-R&D firms, R&D firms save less of their operating cash flow. This is in stark contrast to the extant literature in advanced economies, which shows that savings are essential to smoothen lumpy, irreversible and risky investments in innovation. We find this is due to the reversal in firm-specific factors, with R&D firms in this context being larger and more mature; hence, relying less on internal financing sources compared to young and less-mature R&D firms in advanced economies. We interpret our results as suggestive of the overarching influence of access to external finance as a major determinant of the propensity to save and deterrent to investing in innovation. Our finding helps explain the glut in innovation amongst small and young firms in emerging markets and calls for policies that promote innovation.

Exploratory and exploitative OFDI from emerging markets: Impacts on firm performance

This study identifies exploratory and exploitative OFDI as two distinct approaches for emerging market (EM) firms to overcome their liability of foreignness in overseas markets. It assesses the performance impacts of both types of OFDI through investigating three sets of questions. (1) What are the differential impacts of exploratory and exploitative OFDI, and how long do they persist? (2) How do industry factors in the home country, including technological turbulence and competitive intensity, moderate these effects? And (3) how can firms balance these two types of OFDI across time? Based on multi-sourced data of 766 Chinese firms during 2008–2015, the results show that both types of OFDI promote performance, yet the positive effect of exploratory OFDI lasts longer than that of exploitative OFDI. Moreover, technological turbulence strengthens the effect of exploratory OFDI and weakens that of exploitative OFDI, but competitive intensity strengthens the effect of exploitative OFDI only. Finally, sequential ambidexterity improves firm performance through exploratory‒exploitative OFDI process.

The importance of Interactive Network Branding for business relationship development: insights from emerging markets

Purpose This paper aims to clarify the meaning of Interactive Network Branding (INB) and demonstrate its importance for business relationship development, within a cross-cultural context of emerging markets (EM). More specifically, it integrates the idea of INB through its three branding dimensions into the first three relationship development stages introduced in the seminal article by Ford (1980). By bringing INB into relationship development, and by considering its embeddedness in a cultural context, the study extends current understanding of business relationships in connection to corporate branding. Design/methodology/approach The study is empirical and explorative. To reach the research aims, the authors apply a qualitative approach and present findings from four business relationships in two EM contexts, namely, the Croatian and Russian markets. Ten interviews have been undertaken, and the analysis was conducted by applying sensemaking and narrative approaches. Findings Findings show the influence of INB dimensions on three stages of business relationship development. In both EMs, the external dimension is found to be dominant for the pre-relationship stage while the internal dimension for the early stage. At the same time, mutual INB dimension, which is built on interpersonal interactions, is influencing each stage to a certain manner, while being a dominant dimension in the development stage. Also, the role of each dimension in a specific stage of relationship development is conditioned by the cultural context in which business relationships are embedded. Research limitations/implications Based on the chosen qualitative research approach and focus on two countries, the findings might lack generalizability. Thus, future research is needed to observe business relationship development through INB dimensions in different cultural environments. Practical implications This paper provides a new perspective for managers on coping with the development of business relationships and branding in the EM context. Originality/value This is the first attempt to study business relationship development through branding perspective in general and INB perspective in particular. It builds a deeper understanding of identity, reputation and mutual INB dimension and their manifestation and influence on each relationship stage. In addition, the study has a cultural context, which makes it one of the rare cross-cultural studies related to branding in business marketing research.

CIP Deviations in Emerging Market Economies

This paper examines the response of output and covered interest parity deviations to technology and financial shocks in emerging markets (EM). Following Fukuda and Tanaka (2017), we build a small open-economy model which allows us to highlight three possible theoretical scenarios. First, if much of the gains in domestic output emanate from favorable external technology shocks as opposed to domestic technology shocks, then deviations from covered interest parity will worsen and the basis will widen. When the basis widens, the implied cost of US dollars in the cross-currency swap market increases. Second, if gains in domestic output result from favorable technology shocks in the local economy, as opposed to foreign technology shocks, then the basis will tighten. When the basis tightens, the implied cost of US dollars in the cross- currency swap market reduces. Lastly, if domestic output gains emanate equally from domestic and foreign technology shocks, then the overall effect on the basis is muted. In the empirical part using structural VAR with long-run restrictions, we identify technology shocks as the only source of unit root in output while both technology and financial shocks affect the basis. With this, we document that the response of the basis to technology shocks is positive but sometimes is mixed, even for the same EM basis across maturities. For financial shocks, our results reveal that the response of the basis for each EM is more homogeneous and evolves negatively and is statistically significant across most maturities. We also show that technology shocks lead to gains in real output.

Original Sin and Deviations from Covered Interest Parity

Foreign holdings of sovereign debt in emerging markets (EMs) shift from foreign currency (FC) to local currency (LC), especially after the global financial crisis. We show that such a dissipation of original sin enlarges deviations from covered interest rate parity (CIP) in EMs, as FC debt is more important in transmitting global financial cycles to EMs than LC debt. We further provide evidence that FC debt is more efficient in tapering CIP deviations because it bypasses capital controls, circumvents high inflation, weak institution and asymmetric information, and enhances price discovery.

Destabilizing Stability? Exchange Rate Arrangements and Foreign Currency Debt

Emerging markets (EMs) often respond to shocks by intervening in foreign exchange (FX) markets and thus preventing full exchange rate adjustment. This response can serve to dampen the effect of shocks and increase monetary policy space but may also incentivize economic participants to increase risk taking and take on more FX debt. This paper empirically analyzes the role of exchange rate flexibility in affecting such risk taking, by using rolling correlations and difference-in-difference estimations. The results suggest that a shift towards greater exchange rate flexibility often coincides with a decline in external FX debt. The findings also highlight the importance of using complementary policies to deal with financial stability issues related to the exchange rate, such as FX-specific macroprudential policies and policies aimed at promoting financial development.

Sovereign Asset and Liability Management in Emerging Market Countries

This paper provides an overview of the strategic and operational issues as well as institutional challenges, related to the implementation of the Sovereign Asset and Liability Management (SALM) approach. Application of an SALM framework allows the authorities to identify and monitor sovereign exposure mismatches; increase resilience to foreign currency and interest rate risks; and thus, strengthen financial stability; and implement more cost-effective management of the public-sector debt. The analysis is based on emerging market (EM) countries and illustrated by the experience of Uruguay, using data as of end-2017.

Facing the Quadrilemma: Taylor rules, intervention policy and capital controls in large emerging markets

This paper investigates extended Taylor rules and foreign exchange intervention functions in large Emerging Markets (EM), measuring the extent to which policies are designed to stabilize output, inflation, exchange rates and accumulate international reserves. We focus on two large emerging markets - India and Brazil. We also consider the impact of greater capital account openness and which rules dominate when policy conflicts arise. We find that output stabilization is a dominant characteristic of interest rate policy in India, as is inflation targeting in Brazil. Both countries actively use intervention policy to achieve exchange rate stabilization and, at times, stabilizing reserves around a target level tied to observable economic fundamentals. Large unpredicted intervention purchases (sales) accommodate low (high) interest rates, suggesting that external operations are subordinate to domestic policy objectives. We extend the work to Chile and China for purposes of comparison. Chile’s policy functions are similar to Brazil, while China pursues policies that substantially diverge from other EMs.

Executive Succession Strategy of an Emerging-Market Company: An Investigation into the Spillover Effect

ABSTRACTThe purpose of this articleis to investigate the executive selection strategy of an emerging-market (EM) company. The articlebroadens spillover literature by examining corporate capabilities and consumer-perceived brand-evaluations of an EM company who recruits executives from developed-country (DC) incumbents. Three experiments are designed to test the spillover effects in CEO/CTO appointment scenarios. Results show that an EM company’s brand evaluation would be boosted when consumers perceive that corporate capabilities are strengthened, and that spillover strength varies from the brand image of the DC company. Selecting an executive from a DC incumbent can trigger consumer reevaluation on the corporate capabilities and the brand of the EM company. On the contrary, such selection decisions in emerging markets not only contribute to firm performance but also serve as market promotion strategies. Finally, it is found that as a performance indicator, consumers’ attitudes toward executive appointments indeed correspond to the reality of markets.

Institutions, small local firms’ strategies, and global alliances in sub-Saharan Africa emerging markets

PurposeThe purpose of this paper is to respond to the call of international marketing professionals for more studies on strategies that firms use in response to the complexities of interacting with other institutions in the emerging markets (EMs) of sub-Saharan Africa. The key research question investigated by employing the exploratory qualitative data gathered is: What strategies and global alliances do small local firms (SLFs) in Nigeria adopt to succeed under complex market conditions?Design/methodology/approachThe methodology employed is exploratory qualitative research. The authors conducted extended interviews to generate rich case study data from the top management of the selected SLFs in Nigeria. The interview data were assessed using open, axial and selective coding to uncover macro-narratives that guide SLFs’ strategies and global alliances.FindingsThe macro-narratives derived from the qualitative case analysis reveal a theoretical framework centered on three major elements of competitive strategies in Nigeria: build global capacity and strategic alliances from the get-go; develop local strategic alliances; master matching alliance partners’ needs to create innovative payment plans and, when necessary, shift the transaction cost burden to alliance partners. Matching theory rather than traditional network theories is better at explicating SLFs’ alliances in Nigeria. Implementation of these strategies requires flexible strategic initiatives.Originality/valueThe study adapts institutional interaction theory, network theory, matching alliance perspective, trade credit theories and the literature on small firms’ strategies in EMs to explicate successful small local firm strategies and global alliances under complex market conditions in Nigeria. The recognition that SLFs regularly migrate and shift the burden of transactions’ cost to multiple stakeholders in the supply network by matching customers and supplier needs is important. The discovery of matching theory in explicating SLFs’ global alliances in Nigeria is unique to this study.

Managing customer relationships in emerging markets

Purpose The purpose of this paper is to study the impact of relationship comfort and relationship proneness on the ability of service firms to build and maintain customer relationships in emerging markets (EMs). Design/methodology/approach A field-survey was conducted with retail-banking customers in India (n=300) using a structured self-administered questionnaire with well-established scales. Findings Relationship comfort positively affects key relationship marketing (RM) constructs (e.g. customer satisfaction, trust, commitment and loyalty) and relationship proneness positively moderates (strengthens) the impact of relationship comfort on customer commitment and loyalty. Research limitations/implications The findings may not be generalizable to all customer types using bank services as well as other types of services and in other EMs. Practical implications Service firms in EMs can build and maintain robust customer relationships by using relationship comfort and relationship proneness to strengthen key RM constructs, such as customer satisfaction, trust, commitment and loyalty. Originality/value The paper highlights the importance of maintaining RM as a tool to build valuable customer relationships but also reveals the importance of relationship comfort and relationship proneness in building trust-based customer relationships in the EMs.

The Effect of Internal and External Factors on the Stock Price of Pharmaceutical Companies in Emerging and Emerged Markets

Purpose: The global financial crisis of 2008, considered by many economists to have been the most consequential since the great depression of the 1930s, altered the very fabric of global macro-economy and left many short and long-term impressions at various levels. Though the catastrophic effect of that meltdown penetrated the global market with lightning speed, the aftermath was rather uneven in its manifestation. Countries of American and European continent suffered severely but Asian countries were rather mildly affected and the reason behind this uneven perfusion could be the disparity in the economic environment at the microeconomic and macroeconomic levels in different continents. The Purpose of carrying out this research is to unveil the influence of internal microeconomic factors at firm level as well as external macroeconomic factors at country level on the overall stock price of Pharmaceutical companies of Asia's emerging market (India) and emerged markets of United States of America and Western European countries (Germany, France, UK, and Switzerland) after the global financial crisis of year 2008. Research Design/Methodology: During the present course of the investigation, secondary data of forty pharmaceutical companies from the year 2008 to the year 2017 has been employed to perform an empirical analysis. Moreover, an explanatory and comparative research design has been applied to corroborate the statistical outcome. For statistical analysis, EViews 10 student version, statistical software has been used on the dependent variable Organization Stock and several internal independent variables such as Return on Equity (ROE), Earnings Per Share (EPS), Dividend Per Share (DPS), Dividend Payout Ratio (DPR), PE ratio, firm's asset as well as few macroeconomic level independent variables such as corporate tax, inflation rate, GDP and exchange rate. Findings: Price movement of stocks is not independent in nature and doesn't follow a random walk. There are several factors responsible for the stock price movement such as investor sentiment, social, economic, environment and organization's operational and financial situation etc. This study shows how the aforementioned factors affect the stock prices of sample companies of emerging and emerged markets. Practical Implications: The outcome of this research could be helpful to managers to regulate organization's financial ratios and address the macroeconomic fluctuations to sustain the momentum of the stock price that will inadvertently increase the value of the company. From the investor's point of view, this study could provide them with better anticipation of future trends in the stock prices. Originality/Value: This study offers a contemporary review of the role of organizational and macroeconomic factors on the share price of companies and the stock market, thus contributes to the available literature in this domain. Keywords: Pharmaceutical Companies, Emerging Market, Emerged Market, Microeconomic Variables, Macroeconomic Variables DOI : 10.7176/EJBM/11-36-18 Publication date: December 31 st 2019

World Economic Prospects Monthly

Overview: Ongoing slowdown no reason for panic ▀ Recent activity data suggest that the slowdown in global GDP growth is not yet over. Our baseline view remains that quarterly world growth slows into early‐2020 before picking up a little in H2 in response to ongoing policy support, with 2.5% expansion still seen for both this year and next. ▀ The global composite PMI in October plumbed a new low for the year at 50.8, bringing it closer to the troughs in the previous two growth slowdowns of the past decade and only just above the 50 no‐change mark. While the services index continued to soften, suggesting that industrial weakness is spreading, the global manufacturing PMI has recently stabilised at just below the 50 level. ▀ Whether the services slowdown worsens from here will depend to a large degree on the resilience of consumers, particularly in the US and other advanced economies (AEs). Encouragingly, while AE employment indicators have weakened this year, they still point to solid employment growth within the broad range of the past five years, a positive for spending prospects. Meanwhile, retail sales and consumer sentiment data do not suggest households are tightening their belts yet. ▀ Ongoing geopolitical uncertainties and the dissipating US fiscal stimulus effects may lead to a further slowdown in AE GDP growth in the near term. But the impact of policy stimulus and our assumption that trade tensions between the US and China stabilise may prompt a levelling‐off in GDP growth around mid‐2020. ▀ With some emerging markets (EMs), such as Brazil, India and Turkey, likely to gain some momentum after a weak 2019, EM GDP growth (excluding China) is expected to accelerate in 2020 and help a pick‐up in the AEs. But if these three economies are excluded, the pick‐up in EM GDP growth is rather more subdued. ▀ Overall, our forecast for world GDP growth of around 2.5% in 2019–20 is a long way from recession but is very subdued even by the standards of the past decade.

Monetary policy trilemma, inflation targeting and global financial crisis

AbstractWe empirically investigate the validity of the monetary policy trilemma postulation for emerging market (EME) and advanced (AE) economies under different exchange rate and monetary policy regimes before and after the recent global financial crisis (GFC). Consistent with the dilemma proposition, domestic interest rates are determined by global financial conditions and the FED rate even under floating exchange rate regimes (ERR) in the long‐run. The impact of the FED rates is higher in EME than AE and EME are much more sensitive to global financial cycle under managed than floating ERR. The spillover from the FED rate substantially increases after the GFC in EME with floating ERR and AE. The results from the monetary policy reaction functions based on equilibrium correction mechanism specifications suggest that domestic interest rates respond to inflation and output gaps especially under inflation targeting (IT) in the short‐run. The response to inflation gap tends to be smaller in IT AE after the GFC.

Factors influencing the adoption of real option analysis in RED appraisal: an emergent market perspective

Arising from the growing academic discourse on the inadequacies of the traditional investment techniques, and the benefits of the real option analysis (ROA) in investment appraisal, most investment appraisers are still unwilling to incorporate ROA into the appraisal practice. This study examines the factors influencing the adoption of ROA in development appraisal in an emerging market like Nigeria. Primary data employed for the study was obtained through questionnaire administered on the property development/appraisal officers at the head offices of the estate surveying and valuation (ESV) firms and the property development companies (PDCS) in three first tier property markets of Lagos, Abuja and Port Harcourt in Nigeria. Statistical techniques such as Mean rating, frequency distribution and principal component analysis were employed. The result of the mean analysis reveals that client, market and individual factors were major constraining influences. However, the PCA reveals that firm/management factors, individual factors, client factors and computational/market factors were the major factors influencing the choice of real estate development (RED) appraisal techniques in the Nigeria emerging market. These have variances of 15.767%, 12.895%, 7.818% and 6.992% respectively. The study concluded that while the individual appraiser may not be able to act outside of the company’s/firms policies, there is a need for a paradigm shift within the RED industry to be able to meet up with contemporary demands with respect to RED appraisal techniques and increasing market and investors sophistication.

Upgrading without formal integration in M&A: The role of social integration

AbstractResearch summaryBy adopting a phenomenon‐based research approach, we examine the case of an emerging market (EM) supplier upgrading its position in the automotive global value chain (GVC) through the acquisition of a technologically advanced firm from a developed market (DM). Drawing on GVC and social integration literature, we explore the role of social integration adopted by the EM acquirer to achieve upgrading through acquisition. We develop a conceptual framework where we explain the different social integration mechanisms that EM multinationals employ before and after acquisitions to achieve upgrading.Managerial summaryWhen analyzing an EM firm acquiring a DM firm we found that social integration is a key factor that enables knowledge transfer, particularly if no formal or structural integration occurs. This suggests that the development of mechanisms to facilitate strong socially integrated relationships with acquired firms is central for such type of acquisitions. Our research shows that EM firm managers need to put in place combinations of social integration mechanisms during different phases of the acquisition. Environmental and cognitive social integration mechanisms are crucial for gaining initial legitimacy. Furthermore, affective social integration is important for initiating process and functional upgrading, while cognitive social integration mechanisms become important for initiating intersectorial upgrading.

US vs. Euro Area

This paper analyzes the drivers of cross-border bank lending to 49 Emerging Markets (EMs) during the period 1990Q1-2014Q4, by assessing the impact of monetary, financial and real sector shocks in both the US and the euro area. The literature has traditionally highlighted the influence of US monetary policy on driving cross-border bank flows, and more recently the importance of both US and Euro Area (EA) financial/banking sectors’ related variables. Our contribution is the simultaneous analysis of the role of these US and EA drivers, as well as their interactions with real sector shocks. We corroborate the negative impact of US monetary policy tightening on cross-border lending to EMs, but we find that EA monetary policy seems to have an impact mostly on Emerging Europe, reflecting the fact that cross-border lending to most other EM regions is dollar denominated. We also find that real sector shocks in both the US and EA trigger an increase in cross-border lending, but less in EA when modeling the financial sector. Finally, for financial sector shocks, such as those associated with a decrease in bank leverage, our results indicate a broad-based overall contraction of cross-border lending if the shock originates in the US, and heterogenous effects across borrowing regions if the shock originates in the EA.