Emerging Market Penetration, Inventory Supply, and Financial Performance

Abstract

Realizing potential benefits from emerging market penetration requires firms to address inherent supply chain challenges. A major challenge is for firms to manage costly inventories to address demand and supply risks in emerging markets. However, emerging market penetration may offer opportunities for firms to lower inventory levels, reduce costs, and improve operating performance. Using data for 482 manufacturing firms over the 5‐year period, 2003–2007, obtained from the COMPUSTAT Industrial and Segment Databases, this article examines the relationships between emerging market penetration, inventory supply, and financial performance. Our results show that a multinational firm's sales penetration into emerging markets is associated with fewer days of inventory supply and improved financial performance. As emerging market penetration may allow firms to operate with lower inventory supply, the positive effect from emerging market penetration, such as labor cost reductions, may be enhanced due to inventory cost savings.

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