Transforming Business Models in Fast-Emerging Markets–Lessons from India

There is a need for understanding the entrepreneurship and business models in the emerging economies, especially the fast-expanding ones, from a different perspective as compared to the developed economies. The consistent gross domestic product (GDP) growth rate, significant socioeconomic potential, untapped needs of the population, and economic growth potential in the fast-expanding emerging economies like the BRIC nations (Brazil, Russia, India, and China) have changed the paradigm for investment, thereby creating a new economic development reality and focus for the global companies. However, achieving success in these emerging markets has its own unique mix of challenges. This requires a transformative and innovative mind-set toward conceptualization of a working business model that can fit into the reality of the socioeconomic and cultural challenges of these emerging markets. Further, the business model changes and alignment in these emerging markets require closer analysis and understanding of the global trends as well as ability to leverage the emerging technologies and linkages. The objective of this article is to explore the magnitude of opportunities and emerging business models transforming the socioeconomic landscape in fast-expanding emerging markets. In doing so, the article attempts to provide an overview of the emerging business model typologies and patterns that will enable the global companies to make better-informed decisions and build their presence in the fast-expanding emerging markets. © 2015 Wiley Periodicals, Inc.     

Measuring the impact of brand-celebrity personality congruence on purchase intention

The present study aims to understand the impact of congruence between brand and celebrity personality on consumers attitude and purchase intentions. The data were collected from 382 business school students in India. Drawing from the theoretical frameworks of Attribution theory, Attitude theory, User imagery, Elaboration Likelihood Model, and match-up hypothesis, results reveals that congruence between celebrity and brand personality positively impacts the brand recall, brand associations, and reinforces the brand personality. Which favorably and significantly impacted attitude toward the advertisement and brand. Attitude toward brand has positively impacted purchase intention. ‘Brand personality self-image congruence’ and ‘involvement level with the brand’ were found to moderate the impact of brand association and brand personality reinforcement on attitude toward advertisements and brand. The paper provides practical implications for the advertisement agencies and media managers.     

Portfolio Composition and Valuation Effects in Emerging Market Economies*

ABSTRACT

The increase in cross-border assets and liabilities of nations with globalization, implies small asset price and currency movements create large wealth changes. The national net external position is increasingly driven by valuation effects, which the current account does not capture. We analyze valuation effects for a group of seven emerging economies, namely Brazil, Colombia, India, Republic of Korea, Mexico, Peru and Turkey for the time period 2005:Q1-2015:Q4 by scrutinizing their external asset portfolio while controlling for country fundamentals. Both asset and liability categories of Direct Investment equity are found to positively impact valuation. Equity liabilities and debt assets of Portfolio Investment positively influence valuation. Debt liabilities of all kinds of investment negatively impact valuation. Countries with stronger currency tend to gain through valuation effects. An appreciated real effective exchange rate is associated with higher valuation gains. We also found non-linear effects of the composition of external debt portfolio by interacting external portfolio and country characteristics. The external portfolio selection of emerging economies (with more in Direct Investment equity liabilities and Portfolio Investment debt assets) in the period has shielded them from global volatility, and enabled valuation gains.     

Growth Options, Beta, and the Cost of Capital

We show how to decompose a firm's beta into its beta of assets-in-place and its beta of growth opportunities. Our empirical results demonstrate that the beta of growth opportunities is greater than the beta of assets-in-place for virtually all industries over all periods of time dating back to 1977. The difference has important implications for determining the cost of capital. For example, when choosing comparables to determine a project beta one should match the growth opportunities of the project with those of the comparable firm. Assuming a 6% market equity risk premium, accounting for growth opportunities alters the project cost of capital by as much as 2% to 3%.     

How Governments Promote Monopolies: Public Procurement in India

Government officials exert tremendous power when they buy goods and services from private companies. By setting the terms and conditions under which public procurement takes place, public officials help determine which companies will thrive and which ones will fail. This is one of the important ways governments help create and sustain monopolies in the private sector. But since the bidding process to sell products or services to the government is supposed to be an open and fair competition, how does it become skewed toward businesses that already dominate markets? We examine a particular source of bias: the eligibility criteria for bidding in public procurement tenders. These criteria often allow a few large, private companies to bid on government contracts, but they exclude a large number of small and medium‐sized enterprises. We study the terms by which offers are solicited in India through tenders floated for transportation projects: roads, highways, bridges, and civil construction. We find that the eligibility criteria impose an unnecessarily heavy burden on small firms, potentially knocking them out of the competition and discouraging them from participating in other procurement processes. In this way, the process reinforces monopolies instead of breaking them up. While this study focuses on India, the results also apply to similar economies.     

Distress Anomaly and Shareholder Risk: International Evidence

Financially distressed stocks in the United States earn puzzlingly low returns giving rise to the distress risk anomaly. We provide evidence that the anomaly exists in developed countries, but not in emerging ones. Using cross‐country analyses, we explore several potential drivers of returns to distressed stocks. The distress anomaly is stronger in countries with stronger takeover legislation, lower barriers to arbitrage, and higher information transparency. In contrast, shareholder bargaining power and expected stock return skewness in a country do not affect the anomaly. These findings suggest that various aspects of shareholders’ risk play an important role in shaping distressed stocks returns.     

Real and Financial Sector Interaction Under Liberalization in an Open Developing Economy

A short‐run model incorporates instantaneous portfolio equilibrium with macroeconomic flows to clarify the structure of real–financial sector interactions. If equity and foreign exchange markets are introduced in structuralist theories of asset markets in developing countries, the key result that a fall in money supply raises the rate of inflation now holds only under special conditions on partial derivatives. But there is a tendency for interest rates to rise and for fluctuations in asset prices. Fuller integration of asset markets moderates these fluctuations. Outcomes are stable in spite of the generalized complementarity distinguishing equity markets from loan markets. Expectations play a major role. Implications for policy are to link domestic interest rates to foreign, remove artificial barriers to market integration, and stimulate demand as well as supply.     

Equity market liberalization and corporate governance

Equity market liberalizations open up domestic stock markets to foreign investors. A puzzle in the literature is why developing countries exhibit relatively small financial impacts associated with liberalizations. We use cross-firm variation in corporate governance at the time of the official liberalization of the equity market in Korea to test whether governance can explain the extent to which firms benefit when countries liberalize. The results show that better-governed firms experience significantly greater stock price increases upon equity market liberalization. Following the liberalization in Korea, foreign ownership in firms with strong corporate governance was significantly higher than that in firms with weak governance. Better-governed firms also exhibit higher rates of physical capital accumulation after liberalization.     

Japan's Negative Risk Premium in Interest Rates: The Liquidity Trap and the Fall in Bank Lending

Japan's interest rates have been compressed toward zero because of pressure coming through the foreign exchanges. Twenty years of current‐account surpluses have led to a huge buildup of claims – mainly dollars – on foreigners. Because of ongoing fluctuations in the yen/dollar exchange rate, Japanese financial institutions will only willingly hold these dollar claims if the nominal yield on them is substantially higher than on yen assets. In the 1990s to 2002 as US interest rates have come down, portfolio equilibrium has been sustained only when nominal interest rates on yen assets have been forced toward zero. One consequence is the now infamous liquidity trap for Japanese monetary policy. A second consequence is the erosion of the normal profit margins of Japan's commercial banks, leading to a slump in new bank credit and an inability to grow out of the overhang of old bad loans.     

The Coal Mine Mafia of India: A Mirror of Corporate Power

An investigation of the source of power of mafia‐type organizations may reveal how other non‐state actors can operate as if they are independent of the state. This study of the coal mafia in Dhanbad, India shows that power often derives from socially hierarchical relationships involving debt and/or caste. It also demonstrates how state policies that are thoughtlessly implemented may solidify existing hierarchies. By analogy, modern corporations gain some of their power by behaving as if they were semi‐sovereign institutions that draw their strength informally from social networks and other extralegal relationships. The mafia in the Dhanbad coalfields emerged through a series of institutional changes. Labor shortages were initially resolved by labor intermediaries, who eventually controlled the labor through linkages associated with debt, caste, and social obligations. These intermediaries eventually assumed official positions in labor unions, which gave them a platform for electoral politics. When the coal industry was nationalized, the union leaders further solidified their position in the nationalized corporation. In this way, private labor intermediaries became local political leaders who controlled the state apparatus to some extent. Corporations follow similar patterns. Both mafias and corporations exploit weak governments, collude with them, and often operate with a high degree of independence. Like mafias, corporations often derive their power from socially embedded networks that they craft in local communities and populations. Because the roots of their influence are embedded in social networks, simple legal and regulatory changes are often insufficient to limit their power. Transnational corporations engaged in extraction of natural resources share with mafias the ability to leverage monopoly power in one domain into control of other domains. As a result, this case study of the coal mafia in India offers a unique entry point to understand corporate sovereignty.