Decision-making framework for investing in emerging markets. A demonstration on the cocoa industry in Ivory Coast

DOIhttps://doi.org/10.1108/WJSTSD-07-2016-0048
Pages290-309
Date02 October 2017
Published date02 October 2017
AuthorDominic Hess,Roger Moser,Gopalakrishnan Narayanamurthy
Subject MatterPublic policy & environmental management,Environmental technology & innovation
Decision-making framework for
investing in emerging markets
A demonstration on the cocoa industry
in Ivory Coast
Dominic Hess and Roger Moser
University of St Gallen, St Gallen, Switzerland and
Gopalakrishnan Narayanamurthy
Quantitative Methods and Operations Management (QM & OM) Area,
Indian Institute of Management Kozhikode, Kozhikode, India
Abstract
Purpose The purpose of this paper is to identify and understand the obstacles and drivers of financial
investors while deciding upon investment opportunities in emerging markets.
Design/methodology/approach Relevant factors for financial investors in emerging markets were
identified through a literature review and a series of expert interviews. Identified factors were broadly
grouped into three categories, namely, microeconomic aspects, macroeconomic aspects, and aspects of the
functionality of the local banking system. Finally, an expert panel (Delphi) technique is used to validate the
findings in cocoa industry in Ivory Coast.
Findings A decision-making framework that enables the evaluation of the attractiveness of an industry in
emerging market from a financial investor perspective is developed and its application is demonstrated on the
cocoa industry in Ivory Coast. Probability and consensus of the projections for the individual decision
elements are tabulated along with the insights into both encouraging and discouraging aspects.
Research limitations/implications Current study is a timely contribution to the call for papers in the
research literature to develop frameworks that are contextualized in emerging markets. Similar to any other
qualitative study, this study lacks the generalizability of results. But, the framework developed can act as a
starting point toward the generalizability of the findings in future.
Practical implications Decision elements identified in this study can act as a checklist for financial
investors and top management to choose the elements that are relevant to the investment problem being dealt
by them. Also, the study can act as a handy demonstration to practitioners for applying the framework using
expert panel.
Social implications A major challenge of the investment environment in emerging market is the
non-availability of quality information on the potential investment opportunities. In this study, the authors
suggest a framework to overcome this information asymmetry challenge and expect it to promote
financial investments in emerging economies which in turn will improve the quality of life of people in
these economies.
Originality/value First study to present an approach to help financial investors to conduct profound
evaluation and gain more in-depth insights into the future investment opportunity attractiveness of a
particular industry in an emerging market.
Keywords Emerging markets, Delphi study, Ivory Coast, Cocoa industry, Financial investment
Paper type Research paper
1. Introduction
Emerging markets are attractive as their growth drivers are fundamentally embedded in global
macro trends including a young workforce or a growing middle class (Rapoza, 2011; Khanna
and Palepu, 2010). In the face of these vast growth opportunities, financial investors are
presented with many interesting investment opportunities in emerging markets. They, however,
are also confronted with the challenge of finding the most attractive markets as growth
developments in emerging economies vary from industry to industry and are subject to
numerous influencing factors. A major challenge of the investment environment in emerging
markets is the struggle of investors to obtain quality information and detailed insights on their
World Journal of Science,
Technology and Sustainable
Development
Vol. 14 No. 4, 2017
pp. 290-309
© Emerald PublishingLimited
2042-5945
DOI 10.1108/WJSTSD-07-2016-0048
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2042-5945.htm
290
WJSTSD
14,4
potential investment opportunities. According to Khanna and Palepu (2010), emerging markets
are not only emerging in their forecast potential or liberalizing investment environments but also
in the institutional infrastructure needed to support their nascent market-oriented economies.
Financial investors in emerging markets can often not rely on the same insights and
frameworks as investors in developed markets because the access to accurate information is
limited through the lack of data and absence of reliable intermediaries (Khanna et al., 2005;
Bekaert and Harvey, 2002). Acknowledging the uniqueness of emerging markets,
many researchers who have studied firms in emerging economies have argued for studying
these firms using new theories as old theories are based on the analysis of advanced
economy multinational companies (e.g. Guillén and García-Canal, 2009; Luo and Tung,
2007; Mathews, 2006). Another group of researchers argue that studying emerging
economies helps in extending existing theories (Ramamurti, 2009; CuervoCazurra, 2012;
Ramamurti, 2012).
The high uncertainty and dynamic changes increase the importance of direct
information gathering for financial investors in emerging markets forcing them to allocate a
high amount of resources to the collection and processing of information (Hartman et al.,
1995). Due to this deficiency of quality information, decision makers often rely on statistics
and historic information to estimate the potential of possible investments. The use of
composite indices can also be perceived as problematic when used as a method to identify
future investment opportunities in emerging markets. According to Khanna et al. (2005),
composite index-based analyses do not enable a deeper differentiation of the market as they
cannot display warning signals in the environment, and essentially conceal more than they
reveal. These conclusions go in hand with McKenzie et al. (2009), who describe that
important weak signals for future changes might be missed when inferring on data of the
past and point out the importance of the inclusion of future-oriented information in the
decision-making process, especially in fast-moving, dynamic, and unstable market
environments such as emerging markets (McKenzie et al., 2009; Gnatzy and Moser, 2011).
A rapidly evolving business environment, bolstered with the lack of historic data,
presents challenges for information gathering efforts of companies operating in emerging
economies (Bekaert and Harvey, 2002; Khanna and Palepu, 2010). A dynamically
progressing environment differs to the relative stable conditions found in developed
markets making it necessary to explore new business analysis approaches in order to adapt
to increased uncertainty and dynamic developments. Bekaert and Harvey (2002) state that
many current models are not able to account for this dynamic process in emerging markets
and conclude that such markets provide a challenge to existing models and request for the
creation of new models. Recently, Beugré (2015) calls for developing new techniques that are
contextualized and embedded in emerging markets culture.
The objective of this paper is to address these gaps in literature by presenting a
framework and an approach to help financial investors gain more in-depth insights into a
particular industry in an emerging market that go beyond the analysis of statistics or
industry reports and allow for an additional profound evaluation of the future attractiveness
of specific investment opportunities in an industry. Therefore, through this study, following
research questions (RQ) will be answered:
RQ1. What are the key factors that needs to be evaluated by financial investors for
understanding the attractiveness of an industry in emerging market? How can
these factors be grouped together to develop a framework that can guide the
financial investors?
RQ2. How can this framework be effectively applied to gather maximum insights on
both encouraging and discouraging aspects of investing in an industry in
emerging market?
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framework

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