Financial Sector Development


Capital. It’s the building block of any business. Yet in less developed economies it is extremely costly if it is available at all. Our new Financial Sector Development (FSD) Initiative aims to identify and implement ways to profitably increase the access to capital in emerging economies.

One of the main challenges for financial institutions operating in emerging economies is the cost associated with moral hazard problems – the party receiving the investment doesn’t have the same incentives as the investor to ensure its profitable use and the behavior of the recipient is costly to monitor. We are exploring two focus areas within this initiative which both address the moral hazard problem, but in different ways.

For more information about our FSD Initiative, please send an email message.

Focus Areas

  • Remittances: The World Bank estimates that remittances to emerging markets amounted to $436 billion in 2014. The effect of these remittances on income, growth, health, education and entrepreneurial activity has been studied in the literature. Our interest is not just in observing the effect of the remittances, but also in how to use them in an instrument that would make capital more accessible in these economies. We are looking at ways of capitalizing on the knowledge the remitter has about the individual to whom the remittance is being sent.
  • Borrowing Institutions: The second approach focuses on how borrowers in emerging markets can adopt the laws of developed economies by, for example, committing to the developed economy’s securities laws.


By focusing on both the wider use of existing financial instruments and the process of creating and adopting innovative financial contracts for intermediating funds and managing risk, FSD aims to bolster economic growth in emerging economies. To this end, FSD engages in applicable research and also engages institutional partners, faculty and students in projects designed to develop innovation mechanisms that lower the cost of capital.


Programs & Projects

Knowledge Sharing

  • Multinational Firms, Labor Market Discrimination, and the Capture of Competitive Advantage by Exploiting the Social Divide

    Knowledge Resource: Economic Development/Growth, Finance/Microfinance


    The organizational theory of the multinational firm holds that foreignness is a liability, and specifically that lack of embeddedness in host-country social networks is a source of competitive disadvantage; meanwhile the literature on labor market discrimination suggests that exploiting the…
  • Cross-Border Reverse Mergers: Causes and Consequences

    Knowledge Resource: Finance/Microfinance


    We study non-U.S. companies that have used reverse mergers as a means to adopt U.S. corporate law (and sometimes U.S. securities law as well). Early adopters of cross-border reverse mergers and those firms that hired a Big Four auditor exhibited…
  • A Reexamination of Tunneling and Business Groups: New Data and New Methods

    Knowledge Resource: Finance/Microfinance


    One of the most rigorous methodologies in the corporate governance literature uses firms’ reactions to industry shocks to characterize the quality of governance. This methodology can produce the wrong answer unless one considers the ways firms compete. Because macro-level shocks…
  • Egalitarianism and international investment

    Knowledge Resource: Economic Development/Growth, Finance/Microfinance


    This study identifies how country differences on a key cultural dimension—egalitarianism—influence international investment flows. A society’s cultural orientation toward egalitarianism is manifested by intolerance for abuses of market and political power and a desire for protecting less powerful actors. We…
  • Labor Market Institutions and Global Strategic Adaptation: Evidence from Lincoln Electric

    Knowledge Resource: Economic Development/Growth, Finance/Microfinance


    Although one of the central questions in the global strategy field is how multinational firms successfully navigate multiple and often conflicting institutional environments, we know relatively little about the effect of conflicting labor market institutions on multinational firms’ strategic choice…
  • Can foreign firms bond themselves effectively by renting U.S. securities laws?

    Knowledge Resource: Finance/Microfinance


    The study tests the functional convergence hypothesis, which states that foreign firms can leapfrog their countries’ weak legal institutions by listing equities in New York and agreeing to follow U.S. securities law. Evidence shows that the SEC and minority shareholders…



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