The promise and limits of financial engineering in emerging markets

This chapter considers why quality enhancement is sometimes, but not always, available for emerging-market financial instruments. It concludes that sometimes, but not always, economies of scope will pen-nit quality enhancement to be provided at a cost lower than the associated benefit. These economies of scope are available when political risk is below a certain level; if political risk is, or is perceived to be, at or above that level, quality enhancement will not be available, except on terms likely not to be worthwhile for an emerging-market firm. More broadly, the increment of quality enhancement that can be exploited is limited. However, financial engineering has shown some promise in increasing the exploitable increment.