Institutional Voids in Emerging Economies' Financial Markets
Emerging economies face institutional voids in their financial markets, impacting business firms' growth. This study explores the impact and implications of underdeveloped financial institutions in driving profitable growth.
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Presentation Transcript
Institutional Voids in Financial Markets of Emerging Economies Abdul Qadir Shah BADM 504
Introduction Introduction What are emerging economies/markets? Emerging economies are low-income, rapid-growth countries using economic liberalization as their primary engine of growth - (Hoskisson et al., 2000). Palepu and Khanna (1997) defined emerging economies from the perspective of absence or under-development of institutions. Both schools of thoughts have given primary focus to institutions.
Introduction Introduction Like all other institutions, financial markets in emerging economies have institutional voids. There is a lack of or underdeveloped banking system, under- writers, brokerage firms, bond markets, auditors, rating agencies, and other financial intermediaries. Absence or underdevelopment of financial institutions and markets have profound implications for financial performance of business firms.
Research Question Research Question Does Lack of financial institutions substantively and significantly impact the profitable growth of business firms in emerging markets?
Method and Sampling Method and Sampling A systematic review of the literature, qualitative and empirical, on the topic. The field of emerging markets, especially institutional voids is relatively new and evolving. There is lack of specific literature related to voids in financial markets of emerging economies.
Key Words and Selection of Articles Key Words and Selection of Articles The following key words were use: Financial Institutions; Institutional Voids; Financial Constraints; Emerging Markets; Profitable Growth of Firms. In the academic search engines of JSTOR, Emerald, Science, Direct, Harvard Business Publishing, and Google Scholar used for research of relevant literature.
Inclusion and Exclusion Criteria Inclusion and Exclusion Criteria As the literature is scare on the topic, the following inclusion and exclusion criteria was applied, Inclusion Criteria - All papers that addressed lack, void, absence, or under-developed of financial and capital markets and institutions in emerging markets (regardless of citations and time period). - All papers were included regardless of qualitative or quantitative approach. - All or any emerging markets were studies, those paper were included. Exclusion Criteria - Papers that addressed financial and capital markets and institutions but did not address the financial impact on firms. - Papers that did not address the topic explicitly in emerging markets.
Journals and Articles Journal Number of Articles Journal of International Business Studies 8 Strategic Management Journal 4 Academy of Management Journal 1 Journal of Management Studies 2 Harvard Business Review 5 Emerging Markets Finance and Trade 1 Research in International Business and Finance 1
Journals and Articles Journal Number of Articles Journal of Banking and Finance 4 Academy of Management Review 2 Emerging Markets Review 2 International Business Review 2 Journal of Monetary Economics 1 International Monetary Fund 1
Results and Analysis - Themes 1) Business Groups - Business groups serve as financial institutions alternatives. - Firms with business group affiliations are saved from negative financial implications. - Governments in EMs need to nurture financial institutions in order to facilitate individual firms. 1) Information Asymmetry - Due to absence of credible financial information, firms, especially individual firms are at greater risk of bad choice, pulling out of deals. - Investors, creditors, and business firms have increased transaction costs related to financing.
Results and Analysis - Themes 3) Transaction Costs - Due to information asymmetry transaction costs drive up, especially for individual and small firms. - Business group affiliate firms can off-set transaction cost increase, making them more competitive. 4) Miscellaneous Themes - Lack of financial institutions fend-off potential FDI into emerging markets, which creates a vicious circle. - Also, voids in financial markets also push entrepreneurs to be more imitative and less innovative.
Future Research How to formalize/institutionalize informal arrangements? How to democratize these newly founded institutional arrangements? What is the impact of lack and underdevelopment of financial institutions on innovation? Lastly, there should be nuanced and specific focus on institutional voids in financial markets of emerging economies.
Conclusions The topic is studied collectively with other institutional voids of emerging markets. Most of the research and practitioners focus is on avoidance and exploitation, more needs to be done to, - Research the topic with a nuanced focus. - Formalize the informal arrangements, - and democratize the new institutions.
Thank you & Questions
