Academic journal article Journal of Electronic Commerce Research

How Investors Value Industrial Policies for E-Business Firms in Emerging Markets

Academic journal article Journal of Electronic Commerce Research

How Investors Value Industrial Policies for E-Business Firms in Emerging Markets

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

E-business plays an important role in the new economy [Jorgenson 2001]. With the corresponding creation of new industries, numerous firms have been introduced to the various world exchanges. Many new firms have become large enough to be listed on the S&P 500 and the Dow Jones Industrial Index [Singh et al. 2005]. E-business relies heavily on new products and technology, so the costs of research and development (R&D) can be substantial; furthermore, success based on such expenditures is far from certain [Srinivasan et al. 2009]. Investors who are motivated by cash flow expectations-in particular, the prospects of accelerating future cash flows and reducing associated risks [Srivastava, Shervani, and Fahey 1998]-must consider both the (expected) benefits and the downsides (technology complexity and benefit uncertainty). Therefore, e-business firms would be better off not only pursuing the traditional objective of increasing market share or corporate growth but also maximizing shareholder wealth within the overall framework of a country's industrial policy [Singh 1999, 2000]. Moreover, understanding the financial market response to e-business industrial policies is important because a firm's financial health is not only the ultimate measure for the success or failure of any strategic initiatives [Luo and Bhattacharya 2006] but also one of the most important measures of public policy effectiveness [Schwert 1981].

E-business in developed countries is growing continuously and it has grown in emerging markets as well. For example, as the Chinese government presented in its "Decision of the State Council on Accelerating the Fostering and Development of Strategic Emerging Industries," e-business is one of the most important industries in China because of its contribution to the national economy [Chao et al 2012]. E-business firms are growing rapidly in China's capital market; their average rate of growth in terms of total stock market value is over 100% per year [ 2012]. However, emerging markets have certain characteristics that create a distinctive environment for e-businesses. First, the "visible hand" of the government is more powerful in emerging economies than in mature markets. In mature markets such as the U.S., the stock market and the venture capital market provide firms with cheaper external sources [Allen, Chui, and Maddaloni 2004]. In emerging markets, however, these high-growth and high-risk e-business firms are supported financially or non-financially by governments. For example, the Korean government has encouraged firms to introduce new products and industrial processes through an active and interventionist industrial policy [Singh 1998]. Further, the government of Israel has encouraged technological development through the creation of infrastructure and physical facilities for prospective entrepreneurs [United Nations 1999]. Finally, the Indian government has nurtured the growth, development, and maturing of industry through a variety of channels including financial resources, tools, professional guidance, and administrative assistance [Singh et al. 2005].

Second, unlike mature stock markets in developed countries, emerging stock markets are under-regulated and deficient in gathering information and disseminating it to private or public organizations [Singh 1998]. Investors in these markets are still not mature enough to make investment decisions based on complete evaluations of firms.

In emerging markets, e-business industries operate in immature environments with insufficient infrastructure, low acceptance of IT technology, and lack of trained manpower [Summers 1998; Gupta et al. 2010]. Therefore, firms operating in emerging markets face more uncertainty regarding future profits and market value than similar businesses in developed countries.

Despite the above, emerging markets have become increasingly more important in the global economy in recent decades. …

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