Lecture 1: Defining Developing and Emerging Markets
Mandatory readings: Mody (2004) and Hoskisson et al. (2000)
It is not always straightforward to assess market development. There are blurry lines as to what is
considered a developing market (DM) or emerging market (EM).
This lecture delves into definitions of market development and tries to figure out reasons why these
specific definitions exist.
There are different lenses used to define developing and emerging markets.
In the following, we will look at how market development can be defined in commercial, political or
academic terms.
The commercial lens
MSCI Inc. is a provider of decision support tools and services for investors, so this gives a definition
from an investor’s perspective.
It differentiates between different types of markets (frontier markets, emerging markets and
developed markets). In order to be considered “frontier” (i.e. developing) or “emerging”, markets
need to fulfil certain criteria.
Criteria that define developing and emerging markets:
- Requirements related to firm size and liquidity (specific number of companies with a certain
market capitilization and free float, i.e. shares available to ordinary investors).
- Requirements related to market accessibility (e.g. with regards to ownership and capital
flows).
- No requirements in terms of sustainability of economic development. (This is different from
developed countries see underneath)
,MSCI Emerging Markets Index
MSCI world = mostly developed countries of which 75% US stocks + a little bit of Europe and Asia.
MSCI ACWI = all countries together
Not that much change between 2024 and 2025, while countries may change a lot between these
years , companies seem to stay the same.
,Countries considered to be emerging markets by MSCI (same for 2022, 2023, 2024, and 2025)
Emerging markets haven’t changed since 2022.
Further lists of developing and emerging markets commonly used:
Other providers also tell about other developing and emerging markets.
Question: Why would MSCI care about defining what a developing or emerging market is/offer an
index based on developing and emerging markets?
MSCI defines and classifies developing and emerging markets — and offers indices based on them —
because this serves both investors and the markets themselves in important ways.
1. Reflection of opportunity
By identifying and grouping emerging markets, MSCI highlights where there is growth potential and
investment opportunity. These indices allow investors to gain exposure to economies that may deliver
higher future returns as they industrialize and integrate into the global economy. In this sense, MSCI
acts as a facilitator of investment, providing benchmarks and data that make it easier for capital to
flow into developing markets. The classification also signals a market’s stage of development, helping
investors track progress and potential over time.
2. Reflection of risk
At the same time, MSCI classifications and indices reflect the risk profile of these markets. Emerging
and developing markets are typically more volatile and institutionally less stable than developed ones.
By distinguishing them, MSCI helps investors measure, compare, and manage risk exposure across
different regions. For portfolio managers, these indices can serve both as risk indicators and risk
diversifiers, since emerging markets often behave differently from developed ones.
, Political lens
IMF (International Monetary Fund) working paper by Ashoka Mody (2004):
What is an emerging market?
- Baseline characteristics introduced for EMs here can also be applied to DMs.
- Though there might be nuance, arguably – some of the baseline characteristics might be
more or less pronounced for DMs.
Starting point/basic notions:
- Emerging markets are debtors in the global economy. They borrow money from richer
countries (creditors).
- When emerging markets become richer (or more developed), they seek to engage more with
the global economy.
Problematization: institutional flexibility “vs.” transactional flexibility
- Emerging markets are characterized by volatility and transition (of institutions), often
accompanied by flexible policy-making.
- A deeper integration of emerging markets in the global economy further increases complexity
for them (external complexity on top of internal complexity).
- Creditors may thus want to renegotiate contracts for transactions – or “renegotiate debt” to
account for increased complexity and risk exposure; they opt for less flexible contracts, as
they want to decrease potential risk and insecurity in the volatile emerging market.
- This can be perceived critically (systematic disadvantage for EM?).
Mody’s “solution”:
- The high volatility of emerging markets, which has much to do with the evolving and
transitioning institutions of said markets, cannot be cancelled out entirely (a certain
institutional flexibility is “natural”).
- Accordingly, one cannot expect an institutional environment that signals creditors enough
credibility to provide (fully) flexible contracts.
- It is thus advisable for emerging markets, i.e., debtors that strive to become more integrated
in the global economy, to accept a higher degree of transaction-specific commitment (i.e.,
less flexibility in contracts).
- This gives creditors a sense of security/less instability even if the institutional environment is
not strong or fully developed – commitment in transactions signals that an emerging market
strives to become more credible/stable.
- As the institutional environment develops further (becomes more credible), one may move
from commitment in contracts/transactions towards more flexibility.
In short: if objective is to get more integrated in economy it should accept less flexibility in contracts.
A central theme is the tension between commitment and flexibility.
- Investors want commitment: predictable policies, stable contracts, and reliable institutions.
- Governments, however, need flexibility to respond to shocks, crises, or domestic changes.
Mandatory readings: Mody (2004) and Hoskisson et al. (2000)
It is not always straightforward to assess market development. There are blurry lines as to what is
considered a developing market (DM) or emerging market (EM).
This lecture delves into definitions of market development and tries to figure out reasons why these
specific definitions exist.
There are different lenses used to define developing and emerging markets.
In the following, we will look at how market development can be defined in commercial, political or
academic terms.
The commercial lens
MSCI Inc. is a provider of decision support tools and services for investors, so this gives a definition
from an investor’s perspective.
It differentiates between different types of markets (frontier markets, emerging markets and
developed markets). In order to be considered “frontier” (i.e. developing) or “emerging”, markets
need to fulfil certain criteria.
Criteria that define developing and emerging markets:
- Requirements related to firm size and liquidity (specific number of companies with a certain
market capitilization and free float, i.e. shares available to ordinary investors).
- Requirements related to market accessibility (e.g. with regards to ownership and capital
flows).
- No requirements in terms of sustainability of economic development. (This is different from
developed countries see underneath)
,MSCI Emerging Markets Index
MSCI world = mostly developed countries of which 75% US stocks + a little bit of Europe and Asia.
MSCI ACWI = all countries together
Not that much change between 2024 and 2025, while countries may change a lot between these
years , companies seem to stay the same.
,Countries considered to be emerging markets by MSCI (same for 2022, 2023, 2024, and 2025)
Emerging markets haven’t changed since 2022.
Further lists of developing and emerging markets commonly used:
Other providers also tell about other developing and emerging markets.
Question: Why would MSCI care about defining what a developing or emerging market is/offer an
index based on developing and emerging markets?
MSCI defines and classifies developing and emerging markets — and offers indices based on them —
because this serves both investors and the markets themselves in important ways.
1. Reflection of opportunity
By identifying and grouping emerging markets, MSCI highlights where there is growth potential and
investment opportunity. These indices allow investors to gain exposure to economies that may deliver
higher future returns as they industrialize and integrate into the global economy. In this sense, MSCI
acts as a facilitator of investment, providing benchmarks and data that make it easier for capital to
flow into developing markets. The classification also signals a market’s stage of development, helping
investors track progress and potential over time.
2. Reflection of risk
At the same time, MSCI classifications and indices reflect the risk profile of these markets. Emerging
and developing markets are typically more volatile and institutionally less stable than developed ones.
By distinguishing them, MSCI helps investors measure, compare, and manage risk exposure across
different regions. For portfolio managers, these indices can serve both as risk indicators and risk
diversifiers, since emerging markets often behave differently from developed ones.
, Political lens
IMF (International Monetary Fund) working paper by Ashoka Mody (2004):
What is an emerging market?
- Baseline characteristics introduced for EMs here can also be applied to DMs.
- Though there might be nuance, arguably – some of the baseline characteristics might be
more or less pronounced for DMs.
Starting point/basic notions:
- Emerging markets are debtors in the global economy. They borrow money from richer
countries (creditors).
- When emerging markets become richer (or more developed), they seek to engage more with
the global economy.
Problematization: institutional flexibility “vs.” transactional flexibility
- Emerging markets are characterized by volatility and transition (of institutions), often
accompanied by flexible policy-making.
- A deeper integration of emerging markets in the global economy further increases complexity
for them (external complexity on top of internal complexity).
- Creditors may thus want to renegotiate contracts for transactions – or “renegotiate debt” to
account for increased complexity and risk exposure; they opt for less flexible contracts, as
they want to decrease potential risk and insecurity in the volatile emerging market.
- This can be perceived critically (systematic disadvantage for EM?).
Mody’s “solution”:
- The high volatility of emerging markets, which has much to do with the evolving and
transitioning institutions of said markets, cannot be cancelled out entirely (a certain
institutional flexibility is “natural”).
- Accordingly, one cannot expect an institutional environment that signals creditors enough
credibility to provide (fully) flexible contracts.
- It is thus advisable for emerging markets, i.e., debtors that strive to become more integrated
in the global economy, to accept a higher degree of transaction-specific commitment (i.e.,
less flexibility in contracts).
- This gives creditors a sense of security/less instability even if the institutional environment is
not strong or fully developed – commitment in transactions signals that an emerging market
strives to become more credible/stable.
- As the institutional environment develops further (becomes more credible), one may move
from commitment in contracts/transactions towards more flexibility.
In short: if objective is to get more integrated in economy it should accept less flexibility in contracts.
A central theme is the tension between commitment and flexibility.
- Investors want commitment: predictable policies, stable contracts, and reliable institutions.
- Governments, however, need flexibility to respond to shocks, crises, or domestic changes.
