Resource Dependency,Innovative Strategies,and Firm Performance in BOP Markets

Low‐income markets have attracted the interest of academics, politicians, and business leaders alike. In recent years, numerous companies such as Unilever, Cemex, Tetrapak, and Vodafone have provided evidence that low‐income markets offer commercial business opportunities and that private companies can realize profitable business activities while simultaneously contributing to the alleviation of poverty. However, companies are challenged by constraining conditions such as poor infrastructure, nonexistent distribution channels, illiteracy, corruption, lack of enforceable legal frameworks, and violent conflicts when entering those markets. In order to succeed, companies develop new strategies, introduce innovative business models, and develop novel capabilities. Three innovative practices are commonly named in the literature that should enable companies to operate successfully in low‐income markets: (1) integrating the local population and local entrepreneurs to cocreate products; (2) cooperating with nontraditional or fringe stakeholders; and (3) building local capacity, which means improving the market conditions of low‐income markets. This study applies a resource dependence perspective as it provides valuable explanations on the interaction between companies and their environment, how companies cope with environmental constraints, and how the environment and different strategies affect business outcomes. By integrating a resource dependence perspective, the study theoretically frames the strategic recommendations of the literature and answers the underlying research question of whether environmental conditions of low‐income markets cause the execution of innovative practices and whether such practices influence the outcome of companies operating in low‐income markets. The research hypotheses are tested in a structural equation model against data of 103 firms operating in low‐income markets. The study reveals that companies integrate local actors to cocreate products and cooperate with nontraditional and fringe stakeholders to reduce resource dependency. Local capacity building, which means improving the local environment, is only applied by companies when strong partnerships with nontraditional and fringe stakeholders are established. Finally, the study shows that partnerships with nontraditional and fringe stakeholders as well as local capacity building have a positive effect on organizational performance. Thus, when companies aim to enter low‐income markets, they should not follow the recommendation of the transaction cost theory and internalize resources, but rather cooperate with nontraditional partners and invest in the local environment. Moreover, the study shows that market entries into low‐income markets require long‐term commitments to engage in partnerships with regional authorities, local community groups, and nongovernmental organizations. Without these partnerships, it is not possible to reduce high resource dependencies and to establish successful businesses in low‐income markets. Thus, governments should create general conditions that facilitate the creation of partnerships between nontraditional actors and companies, and assist them to improve environmental conditions in these markets.     

Banks and Microbanks

We combine two datasets to examine whether the presence of banks affects the profitability and outreach of microfinance institutions. We find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks relying on commercial-funding and using traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs). We consider plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment, but we fail to find strong support for these alternative hypotheses.     

Trade and Industrial Policies with Heterogeneous Firms: The Role of Country Asymmetries

This paper explores the role of country asymmetries for trade and industrial policies with heterogeneous firms. The analysis delivers a number of novel results. First, trade policies, infrastructure policies and industrial policies which improve the business conditions in one country have negative productivity and welfare effects on the trading partner. Second, symmetric trade liberalization is immiserizing for a trading partner whose business conditions are inferior. Third, there are gains from trade even for a country whose monopolistically competitive sector with heterogeneous firms is wiped out by switching from autarky to trade.     

PRICE SETTING OF MARKET MAKERS: A FILTERING PROBLEM WITH ENDOGENOUS FILTRATION

This paper studies the price‐setting problem of market makers under risk neutrality and perfect competition in continuous time. The classic approach of Glosten–Milgrom is followed. Bid and ask prices are defined as conditional expectations of a true value of the asset given the market makers' partial information that includes the customers' trading decisions. The true value is modeled as a Markov process that can be observed by the customers with some noise at Poisson times. A mathematically rigorous analysis of the price‐setting problem is carried out, solving a filtering problem with endogenous filtration that depends on the bid and ask price processes quoted by the market maker. The existence and uniqueness of the bid and ask price processes is shown under some conditions.