Lecture 1 - Defining Developing and Emerging Markets
There is not a very clear definition or boundary for:
● Developing Markets (DMs)
● Emerging Markets (EMs)
● Developed Markets
Countries can also differ in aspects (historical, economic, etc.) in whether they are EM or DM
There are three different ways/lenses to TRY to categorize them:
1. Commercial Lens (investors) → MSCI (Morgan Stanley Capital International) →
They classify countries based on:
● Market size & liquidity
● Number of large publicly listed companies
● Market accessibility (ownership, capital flows)
EMs = higher risk, but potentially higher return
2. political → IMF (International Monetary Fund)
- High volatility & transitional character
- Tension between commitment and flexibility
● Too much commitment → not credible
● Too much flexibility → risk of misuse
- Shift from transaction-based commitment to institutional commitment
- No ‘neat solutions’; policy inertia (stagnation) is normal
3. academic Hoskisson et al. (2000) →
- low to middle incomes
- rapid economic growth
- Liberalization as a growth engine
- Rapid political changes
, 3 theories → explain how companies succeed or face challenges in
developing/emerging markets.
1. Institutional Theory
○ Institutions determine how companies operate.
○ In Developing/Emerging Markets (DEMs/EMs), institutions are often unstable
or incomplete, which increases transaction costs.
2. Transaction Cost Theory
○ Transaction costs are high (due to big complicated contracts).
○ Opportunism and agency problems occur more frequently.
○ Result: Firms may avoid market transactions and instead:
- Internalize activities (e.g. subsidiaries instead of outsourcing)
- Choose joint ventures with trusted partners
- Rely on informal governance (trust, relationships)
3. Resource-Based View (RBV) → Intangible/rare resources are crucial:
○ Local knowledge
○ Networks
○ Reputation
○ Relationships with the government
RBV Is about → Being the best cultural and political navigator.
Overarching characteristics of DEMs:
● Institutional voids → Formal institutions are missing or function poorly, so informal
processes become important.
● Informal processes → Relationships and networks are more important than rules.
● Political volatility → Not a flaw, but a consequence of rapid growth.
● Strong government role → Protecting the local economy is often legitimate (from the
DEM perspective).
Important: These characteristics are often Western-biased → therefore, you should also
consider the DEM perspective.
Convergence vs. Divergence
Do countries in the world become more alike over time (convergence), or do they remain /
become increasingly different (divergence)?
● Convergence = the idea that countries:
○ Over time develop the same economic and institutional structures
○ Become more similar to the US / Western Europe
● Divergence = countries:
○ Develop different forms of capitalism
○ Grow economically without copying the Western model
○ Maintain or strengthen their own institutions & culture
There is not a very clear definition or boundary for:
● Developing Markets (DMs)
● Emerging Markets (EMs)
● Developed Markets
Countries can also differ in aspects (historical, economic, etc.) in whether they are EM or DM
There are three different ways/lenses to TRY to categorize them:
1. Commercial Lens (investors) → MSCI (Morgan Stanley Capital International) →
They classify countries based on:
● Market size & liquidity
● Number of large publicly listed companies
● Market accessibility (ownership, capital flows)
EMs = higher risk, but potentially higher return
2. political → IMF (International Monetary Fund)
- High volatility & transitional character
- Tension between commitment and flexibility
● Too much commitment → not credible
● Too much flexibility → risk of misuse
- Shift from transaction-based commitment to institutional commitment
- No ‘neat solutions’; policy inertia (stagnation) is normal
3. academic Hoskisson et al. (2000) →
- low to middle incomes
- rapid economic growth
- Liberalization as a growth engine
- Rapid political changes
, 3 theories → explain how companies succeed or face challenges in
developing/emerging markets.
1. Institutional Theory
○ Institutions determine how companies operate.
○ In Developing/Emerging Markets (DEMs/EMs), institutions are often unstable
or incomplete, which increases transaction costs.
2. Transaction Cost Theory
○ Transaction costs are high (due to big complicated contracts).
○ Opportunism and agency problems occur more frequently.
○ Result: Firms may avoid market transactions and instead:
- Internalize activities (e.g. subsidiaries instead of outsourcing)
- Choose joint ventures with trusted partners
- Rely on informal governance (trust, relationships)
3. Resource-Based View (RBV) → Intangible/rare resources are crucial:
○ Local knowledge
○ Networks
○ Reputation
○ Relationships with the government
RBV Is about → Being the best cultural and political navigator.
Overarching characteristics of DEMs:
● Institutional voids → Formal institutions are missing or function poorly, so informal
processes become important.
● Informal processes → Relationships and networks are more important than rules.
● Political volatility → Not a flaw, but a consequence of rapid growth.
● Strong government role → Protecting the local economy is often legitimate (from the
DEM perspective).
Important: These characteristics are often Western-biased → therefore, you should also
consider the DEM perspective.
Convergence vs. Divergence
Do countries in the world become more alike over time (convergence), or do they remain /
become increasingly different (divergence)?
● Convergence = the idea that countries:
○ Over time develop the same economic and institutional structures
○ Become more similar to the US / Western Europe
● Divergence = countries:
○ Develop different forms of capitalism
○ Grow economically without copying the Western model
○ Maintain or strengthen their own institutions & culture
