**2. The importance of working capital management in emerging markets**

Emerging markets concept was used in economic literature for the first time by the International Finance Corporation (IFC) in 1981. IFC is one of the five1 organizations affiliated to the World Bank. Emerging markets is a concept that is used to represent the markets of countries with high economic potential. These countries are expected to be ranked in the "developed country" class in the future and offer high-return opportunities to their investors [1]. These countries that grow very fast compared to developed countries also have higher risks associated with the sudden stop in economic growth, the sudden fluctuations in asset prices, and the economic and political instability.

According to the "Global Economic Prospects and the Developing Countries" published by the World Bank, developing countries constitute 80% of the world population and also represents 20% of the global economy. The number of multinational corporations operating in emerging markets is now over 20,000. According to *The Economist*, multinational corporations anticipate that 70% of their future growth will be from the emerging markets [2].

The concept of emerging markets has expanded to include almost all developing countries in the period from its existence to nowadays. The rapid development of trade in emerging markets, the efforts of financial liberalization, the growth in financial market, and the need to diversify international portfolio managers have caused investors and companies to focus on the

<sup>1</sup> The World Bank Group consists of five complimentary organizations. These are International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Center for Settlement of Investment Disputes (ICSID).

emerging markets of developing countries. According to the IFC, portfolio investments have continued to grow in emerging markets since the 1980s, with the exception of the financial crisis period. The geographical location of some of the developing countries is presented in **Table 1**.

increasing operating volume, and providing superiority to the competitor firms are closely related to working capital management. In fact, working capital management is not only lim-

Working capital consists of cash and cash equivalents, receivables, and inventories. There are also many factors that influence working capital and its components; therefore, businesses need to be cautious in such decisions and should make detailed analyses. Working capital components' contribution to the purpose of the companies depends on the optimum management of it. In emerging markets where there are insufficient saving volume and capital accumulations, and inadequate financial market depth and financial product diversity are the

This study has been done on mining sector firms in Turkey, which is one of the developing countries, in order to show the relationship between the components of working capital and profitability. In theoretical part of the study, literature review, importance of working capital management in emerging markets, and also general properties of mining companies are handled. In empirical part, panel data analysis is carried out 2009Q4–2015Q3 in mining sector, which is a strategic sector especially for the developing countries. The conclusion section

**2. The importance of working capital management in emerging markets**

Emerging markets concept was used in economic literature for the first time by the

ated to the World Bank. Emerging markets is a concept that is used to represent the markets of countries with high economic potential. These countries are expected to be ranked in the "developed country" class in the future and offer high-return opportunities to their investors [1]. These countries that grow very fast compared to developed countries also have higher risks associated with the sudden stop in economic growth, the sudden fluctuations in asset

According to the "Global Economic Prospects and the Developing Countries" published by the World Bank, developing countries constitute 80% of the world population and also represents 20% of the global economy. The number of multinational corporations operating in emerging markets is now over 20,000. According to *The Economist*, multinational corporations

The concept of emerging markets has expanded to include almost all developing countries in the period from its existence to nowadays. The rapid development of trade in emerging markets, the efforts of financial liberalization, the growth in financial market, and the need to diversify international portfolio managers have caused investors and companies to focus on the

The World Bank Group consists of five complimentary organizations. These are International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Center for Settlement of Investment Disputes (ICSID).

anticipate that 70% of their future growth will be from the emerging markets [2].

organizations affili-

ited to managing short-term assets but also involves short-term liabilities.

main problems, working capital management is becoming more important.

International Finance Corporation (IFC) in 1981. IFC is one of the five1

includes a general evaluation and results.

190 Financial Management from an Emerging Market Perspective

prices, and the economic and political instability.

1

Working capital management is even more important in emerging markets due to insufficient development of financial markets and inadequate capital accumulation. Global crises, which are more and more frequent today with increasing national and international competition, have made working capital management more important especially for developing country firms. The KPMG 2010 report about working capital management states that firms around the world place more emphasis on management of working capital after the crisis [4].

Working capital consists of funds linked to production factors for the period starting from the beginning of production to income generation [5]. Working capital refers to the firm's investment in short-term assets that can be converted into cash in less than a year. Cash and cash equivalents, inventories, and receivables that are current asset items in a balance sheet make up the components of working capital. However, management of working capital is not just about current assets; it also involves short-term liabilities. Especially in Western literature, working capital is stated as a "net working capital" which can be reached by the formula "current assets-current liabilities."

A manufacturing company fulfills three main functions such as production, sales, and collection. The components of working capital are internally related. If these three main functions are performed simultaneously in a company, there will not be a need for working capital. In this study, working capital concept is expressed as a total amount of current assets.


**Table 1.** Developing countries according to geographical locations.

Effective management of working capital, which directly affects the company's liquidity and profitability, is important in terms of business finance. The management of working capital components also contributes business goal. This contribution is intended to maximize the net present value of the companies. Financial manager needs to consider and evaluate the cashgenerating power of the company in the crisis period as well as interest in maximizing the net present value of the company during normal [6].

The main components of working capital, as previously mentioned, comprise current assets and short-term liabilities. The main objective of working capital management is to keep an optimal balance among each of the working capital components [7]. Working capital, which represents the current assets of companies, is one of the main factors affecting the profitability and liquidity of the company. The type of working capital management has an important effect on profitability and liquidity of the companies [8]. There needs to be a significant balance that working capital has to establish between these two factors. In other words, focusing on only optimal liquidity or profitability can have a negative effect on financial performance [9]. The optimal level of working capital for the companies can be achieved by balancing profitability and liquidity. The idle part of the working capital leads to decline in profitability, while the deficit in working capital causes the default risk.

The fact that working capital components are influenced by many factors necessitates financial managers to be careful in their decisions and financial analysis. Companies try to keep an optimal level of working capital that maximizes their value. Accomplishment of this aim depends on efficient working capital management.
