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Introduction to Globalization and Capital Markets
Rotman September 9th 2008

Jim de Wilde

              THE DUBAI CIRQUE DU SOLEIL:   The government of Dubai wants to make Dubai the centre of the world’s entertainment industry.   Cirque due Soleil has gone from being a fusion of Chinese acrobatic dance, street entertainment and Montreal creative cultural fusion to being a multi-billion global product.   The investment of the Dubai government in the Cirque is one of the Canadian business stories of the year and is filled with implications for the way the global economy operates.

THAKSIN ACQUIRES MANCHESTER CITY:  One doesn’t have to be a world football fan to know the commercial value of the positional good called an English Premier Division football team.  Abramovich’s purchase of Chelsea was the arrival of new Russian capital into the major centres of the world.  After Prime Minister  Thaksin Shinawatra left power in Thailand, having failed to manage the mix of globalization and privatization that comes from selling domestic telecommunications capacities to foreign (in this case Singaporean) investors,  he becomes one of the twenty-two owners of this unique positional good, in this case Manchester City.

MASDAR’s CLEAN TECH FUND: In the new planning for a post-oil economy, there is a tremendous advantage if one does not have to meet quarterly expectations.    In this new characteristic of the global economy, the Masdar Clean Tech Fund in Abu Dhabi is well-positioned for long term growth.

KHAZANAH AND TEMASEK BECOME GLOBAL PLAYERS:  The Malaysian and Singapore sovereign wealth funds are examples of new players with increasing global exposure and global interest.   A quick look at the Khazanah and Temasek portfolios shows that they are part of the globalization of investment expertise, and are new partners and players in the global economy.   Khazanah’s investment’s in Chinese waste-to-energy technologies this summer is another template for deal making and a good case study for this discussion. 

            There is a great deal of activity and growth in the global economy in the fall of 2008, from these kinds of case studies.    But there is also a real nervousness about how the global economy as we know it comes out of a perfect storm.  Several negative factors have come into play and we seem to lack a political consensus about how to deal with them.   This reflects the confusion in the way they are discussed in the world’s Business Schools.   What is going on and how do we analyze them more successfully?  As public-policy makers, as investment decision-makers, as citizens of the planet.   That is what this course is about.

            Let’s start with the perfect storm:

             (i)  CDOs, the new derivatives and the tyranny of mathematical models:
badly understood financial instruments re-sold without adequate calculation of inherent risks in disguised “new models”,   the derivatives and mathematical model problem one more time but with higher stakes in a more fragile economy with the collateralized debt obligations (CDOs) at the heart of the mortgage and banking crises;           

            (ii)   The power of petro-capital in global capital formation: There is considerable uncertainty over the role of petro-capital in global capital formation.   This overlaps with the new role of sovereign wealth funds,  but speaks also to the insecurities of a world economy that has taken a long time to move from its carbon dependency and to a more financially stable and predictable source of energy.  The political   uncertainty over its role and function of petro-capital in the global economy   is once again with us.  The volatility of oil prices is the only constant as interruptions of supply can come from the Georgian route of the Baku-Tbilisi-Ceyhan pipeline, and even more importantly, the disinvestment from Russian oil and gas resulting from the Russian behaviour over the TNK-BP deal ;              

            (iii)  The rise of sovereign wealth funds has everyone dusting off their economic theory text books:   The rise of new sources of economic power in private equity funds in Europe and sovereign funds in China, the Emirates, Singapore and now possibly Saudi Arabia and the reemergence of new players from India, Brazil and Russia affects the investment market for acquisitions and mergers.  How will their pattern of investment differ, if at all, from that of Goldman Sachs or the Royal Bank of Scotland?   

            (iv)  Klepto-capital makes rational economic their and the natural efficiency of markets much more theoretical:  The increasingly disruptive effects of klepto-capital,  whether it is drug cartel money in Latin America, Afghanistan or southeast Asia,  the flow of currencies from para-state organizations in Russia and eastern Europe,  or petro-capital transformed into private wealth in, to pick the extreme case,  Equatorial Guinea.

            The convergence of all these phenomena mean that as political economy meets international finance, we are seeing a world which in unrecognizable through the lenses that marked the early days of globalization.

            Optimists, in which camp I count myself, say this is the growing pains of globalization.     Pessimists see some structural flaws in the way international capital is organized.   Until the optimists prevail, there will be continuing uncertainty in the global economy, and difficulty channeling capital to growth opportunities.

            The answers written on the op-ed pages of the world’s newspapers tend to be of three kinds:  (i) from academics who want to defend a particular intellectual perspective on the world (the importance of more tools for analysis of risk is a favorite); (ii) from institutional investors with a position to defend (hedge funds have not destabilized the system); and (iii) from a geopolitics based on nervousness about the rise of new centres of economic power and their accountability.

            In this course, we are closer to the third position, once again seeing a return to Schumpeterian political economy with its emphasis on the preconditions for innovation in rapidly changing markets and the economic psychology of Keynesians who understood that there is an art to consumer confidence.      The intellectual skills requires to navigate twenty first century capital markets are both analytical skills of political economy and a broad understanding of the economic history of innovation in capitalist economies and how that is applicable to the global economy we are currently designing through the day-to-day market decisions and the search for a new global financial architecture.

            Canada has to assess how the new trends:  the rise of sovereign funds and petro-capital,  the competing centres of capital formation with different systems of financial accountability,  the credit crisis caused by the failure of financial markets to measure risk in a manner that captured the fallacious assumptions of “technical”  (i.e. computer-driven) financial instruments.   Like CGI (computer-generated imaging) in films, they should be servants of the plot, not an end in themselves.      All the market-disrupting technological innovations (derivatives in the 1990s,   CDOs in the 2000s) were examples of the technology not serving the goals of value creation.

            The global economy in which we start this term’s analysis is one which is sorting out the misuse of financial instruments, the failure to create a capital market immunized from the impact of petro-capital, and the geopolitics of sovereign funds.     The fluctuation of oil-prices is a constant which will lead to more complex decision-making.  Let’s start with some trends which are going to impact throughout the next few months and then see what strategies are accessible to investors and financial decision-makers operating within the Canadian dollar-zone.    It also is hoped that the implications of this analysis apply elsewhere in B-Schools where the appropriate decision-making models for the 21st Century are being shaped.

            It is impossible to act effectively within the new political economy unless one has some sense of how these changes affect decision-makers.  Arnab Das of Dresdner Kleinwort’s July 2008 Financial Times essay on SWF (sovereign wealth funds) is an excellent starting point for a discussion on the range of future strategies in creating value in the global economy.    The analysis of the strategic decision of sovereign wealth funds creates a need for a different framework of political economy and international finance.  The Monitor Company’s report on the role and strategies of sovereign wealth funds makes an excellent starting point for analysis.    Let us add four case studies:

            (1)  Nakheel buys into the Cirque du Soleil  :  The Cirque has become a major content producer for Los Vegas .   It is a multi-billion dollar Canadian asset, whose expansion capital now comes from sovereign wealth funds based on Gulf Arab oil.

            (2)   Temasek helps Thaksin take control of Shin Corporation, Thailand’s largest mobile telecommunications company:   The economic nationalism engendered from the reaction to Thaksin and the Shin decision resulted in a change in Thailand’s government and an ongoing crisis in terms of economic integration in Southeast Asia.

            (3)   Norway’s sovereign wealth fund owns 1% of Europe’s assets:    The role of Norway’s steady, ethically-driven investment strategy has a profound implication on the development of European business.

            (4)   China investment in Blackstone a mixed success story:  This investment was part of a learning curve for Chinese investors, an excellent exit for Blackstone’s highly innovative founders and part of the integration of China into the global economy.

            (5)   How do capital markets create stability for energy pricing and investing?   J.P. Morgan’s President  Jamie Dimon’s proposal at Aspen that governments create a more stable capital market environment by taxing oil and gas to simulate the effects of rising oil prices and facilitate structural adjustment.

            Let us start with three basic observations:

            (1)  We are living in the twilight of the petro-state.  All the world’s economic activities are being targeted towards fossil fuel substitution.   But right now, the capital markets reflect the significant power of oil (Abu Dhabi, Norway and organized sovereign wealth, China, Singapore) are a significant part of capital formation in the world.     The formation of capital from resource wealth will be replaced by other aspects of global capital markets:  the formation of wealth from environmental conservation, from industrial ecology and conversion to agricultural productivity, real estate denominated transactions).    Right now, Abu Dhabi has wealth from oil which it can convert into venture capital that diversifies the UAE portfolio, as in the role of Masdar.
The next generation of capital formation will come from new financial techniques: 

(a)  Real estate value of common lands – e.g. what is the beach property of Namibia worth?  Who owns it?  

(b)  How much is it worth to pay Indonesia, Brazil or Papua and New Guinea not to harvest rain forests:   how much will the Indonesia Rainforest Conservation Sovereign Fund be worth in 2008?   How will it be capitalized?  What new bond and financial instruments will be required? 
(c)   How do we create incentives for the creation of agriculturally productive land from shrub and desert?  What is the ownership structure of the Sahel?  Will we have a Mali High Protein Yield per Acre sovereign fund in the year 2008?  How will it be collateralized?  

(d)  In the two decade long twilight of the petro-state, what will happen to the revenues coming from Sao Tome e Principe’s oil wealth?   How could it be turned into a Gulf of Guinea pension fund?  Who will the depositors be?  What principles of accountability will there be for the actions of the fund or will it be spent the way Saudi and Russian petro euros are currently spent?

            (2)  Cross-border investment instruments will transform many regional economies.  Let us take the example of Ogaden, the probably illegally transferred desert land “given” to the Ethiopians by the British at the end of the Second World War.  Now that it has oil, what are the investment models which could result in mutual benefits from economic development?

            (3)  The power of the capital markets inevitably triggers economic nationalist responses.  The Temasek-Shin case in Thailand is just the canary in the coal mine.   However, most of our economic theories treat economic nationalism as an inherently negative phenomenon, which means that theoretically we should let the Saudis and Chinese purchase anything they want in a highly liquid international marketplace.    Public policies will be designing market-sensitive economic nationalist instruments.  In this sense, the CDP model in Quebec and instruments like Norsk Hydro in Norway become if not prototypes, new templates from which we can design economic strategies in the emerging global economy.

            In a world where Thaksin leaves and buys a good English football team, and then sells it to an Abu Dhabi investment group, and where Dubai uses an innovative entertainment product from Montreal to establish its leadership over Los Vegas as a global entertainment destination, we are dealing with different instruments and means of value creation.   We are in a period of adjustment now to new patterns of growth and the instruments which worked in a different economic period have now proven to be toxic.   Collateralized debt obligations (CDOs), the so-called credit crunch, were clever little instruments for people with access to computerized trading to gain an advantage in a world of expansion.    The winners made 14.9% returns, the losers 14.3% returns.     Now we are in a different world requiring very different business strengths:  one of the fundamental new skills is an understanding of how global political economy and international capital markets combine to create new strategies and new sources of competitive advantage in the emerging really global economy.


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Opening class Rotman course on Globalization, Capital Market Innovations and Sustainable Prosperity

Jim de Wilde

September 2007


                        There are some new patterns of activity in the global economy.  The first is that there are new categories of growth activity, from motorcycle companies in India to design studios in Shanghai.   From investment behaviour, restructuring of petrochemical companies in Thailand and commercialization of resource production in Kazakhstan create new opportunities for investors.      A slowing of growth in the North American economy can be compensated by enhanced activities in new markets.     The competition for new investors can create an auction for assets.   This is what is called the management of global capital markets.


                        With this comes new challenges:  the globalization of labour gives a competitive advantage to those whose manufacturing facilities lack both unions and safety regulations,   the free movement of capital means that state-controlled capital from Dubai or China can behave the same way as savings-formed capital among institutional investors in Switzerland, Japan or Canada or personal investing from Canadians, Americans or Germans investing through public exchanges,  the concentration of expertise in the hands of private equity players and hedge funds creates new issues of accountability.


                        Let us start the course with some case studies that illustrate these changes in global capital markets, political economy and economic security.  From these we can start to discern future patterns of global economic activity, wealth-creation and financial risk:



(i)  Sovereign wealth funds and global investment hollowing out and reciprocity:  the role of sovereign funds has transformed the logic of trade and investment liberalization, but also assumptions about capital market activities and behaviour.     If we start by looking at the investment strategies of   Singapore and Dubai, Dubai’s oversees investment strategy, China and Qatar’s as case studies; we start to see the shape of new economic activity.


(ii)  Dubai attempts to buy the Auckland airport as a gateway for Pacific travel.  The bid is withdrawn, allowing a possible Canadian investment from Canada Pension Fund Investment Board. 


(iii)  China and Blackstone.   The Chinese government investment activities involve the substantial investment of Blackstone


(iv)  Qatar shops for Sainsbury.  The interest of Gulf capital in restructuring the European retain sector makes the Sainsbury case particularly interesting and relevant.


Sectoral restructuring:


(v)   Russian builder of nuclear plants. Atomstroyexport has developed a strategy for exporting nuclear reactors and in the process is reshaping the global nuclear energy industry.  The competitive structure of the market between Areva, Siemens, GE and Atomstroyexport are revealing of new patterns of global competition with implications for geostrategic debates about nuclear power.


(vi)  Thai petrochemicals.  Thailand’s plans to become a world leader in petrochemicals are another example of national strategies potentially restructuring global capacities in a key sector.


New capital market centres:


(vii)  FT on which Asian centre rivals NY and London .  The spikes in the global economy are creating substantially different roles for Asian markets.  Mumbai, Dubai, Singapore, Hong Kong, Shanghai are all developing new roles in the global economy.  The Dubai Investment bid for the OSX Scandinavian exchange reveals a similar set of strategic issues and challenges about the way the new global capital markets are organized.  


(viii)  FT hedge funds and private equity a line to Berlin.  The German government’s reaction to hedge funds and private equity investment has changed substantially since the Merkel government’s election and an election campaign which raised the question of the role of hedge funds and private equity in the most focused manner since the Malaysian government’s reaction to the role of hedge funds in the 1997 Asian financial crisis.



Political trends that affect global capital market strategies and regulation:


(ix) Estonia and cyber-sabotage .

(x) China and India compete for PetroKazakhstan.

(xi) China as a model for Iran .



            When one examines these eleven case studies, rather like a geological relief-map, one can see the way the world economy is being reshaped.


            (Case 1) The pattern of cross-border investments and M&A is changing with thee emergence of sovereign actors.   These will not behave in the same way as private equity funds or traditional M&A operations.   The importance of government continues to grow, and the difficulty of providing reciprocity (same standards in both jurisdictions) changes the way in which international capital markets behave.   The government of Kazakhstan can but through sovereign equity a real estate project in Canada. 


            Major changes in the financing of infrastructure are made by (case 2) players with large supplies of capital.   Auckland Airport, Dubai Ports activities in its acquisition of P&O leaving it with an ownership position in American ports are prototypical case studies of this new global economy.     


            The Chinese attempt to invest more in the profitable activities of private equity players like Blackstone ( Case 3) show that for China, Dubai, Kazakhstan, the Emirates are engaging in strategic investment activities.   The diversification process of the Emirates from oil and gas leads them into specific new markets like U.K. retail.      Other previous examples of this diversification come from quasi-state players like Kingdom Holding of Prince Al-Waleed    , through which his portfolio of publicly traded companies like Citigroup and Apple is held.   Kingdom is not yet listed on the Riyadh stock exchange.


            Similarly, the Qatar government’s acquisition of U.K. retailer Sainsbury (case 4) represents a substantial change in investment strategy for Gulf capital markets with implications for the valuations of European retail industry in particular.


            The restructuring of global industries, like nuclear energy (case 5) and petrochemicals (case 6) involve substantial numbers of new players emerging from areas where they were not previously market-forming actors.


            Investment banking and portfolio activities are also transforming where there are key areas of activity in the global economy, from the potential rivalries of Seoul, Mumbai, Singapore, Shenzhen, Tokyo, Hong Kong, Shanghai to the New York and London financial markets (case 7).  


            The changing attitudes towards longterm private equity players like Blackstone in Germany from “locusts” like hedge funds to the agents of creative destruction and regeneration of the German Economy (case 8) show how transformative the emergence of these new players has been.


            This all is taking place against a new backdrop of global politics, where non-state actors or actors with the passive backing of states can have severe economic impact.   The example (case 9) of the sabotage of the Estonian economy as the world’s first act of cyber sabotage makes a good starting point for this analysis. 


            The battle between China and India for ownership of the Canadian-formed Kazakh oil company Petro Kazakhstan (case 10) shows the new patterns of competition in the global economy.  


            The emerging China-Iran relationship as great empires attempting to modernize (case 11) also show some new patterns in the way that  the world political economy is evolving.


            The skills required to be successful in global finance in the future will require the understanding of the new trends of wealth creation and investment banking in the global economy.  These cases will focus on questions that are beyond this course or any business degree to resolve in their entirety:   (i)  how does the development of microgeographies, the development of remittances , and the globalization of labour markets affect currency flow and the conventional assumptions about capital formation in emerging markets; (ii)  how does the current credit-crunch in U.S. capital markets affect the relative power of hedge funds, sovereign equity funds and private equity in the operation of the international economy, on issues like privatization, cross-border mergers and acquisitions and sectoral consolidation?   (iii)  how does one achieve  a non-corrupt and predictable global capital market where innovation can be rewarded , entrepreneurs backed and large amounts of capital are not wasted through the kind of “oil curse” process of revenue transfers that have characterized other economic patterns?   (iv) What happens to the quantitative modeling on which much wealth management has been based when Chinese, Singaporean and Gulf capital market strategies operate according to criteria different from those which programmed the assumptions of the modelers.


            My view is that there are two new trends which are going to shape the global capital markets in the next decade:  the first is that the capacity to back entrepreneurs through global investment structures will change dramatically, leading to global venture capital models and strategic alliances between wealth-creating investors.   If this trend is encouraged by the expansion of microcredits and entrepreneurial philanthropy, we will see thousands of new wealth-created companies from Senegal to Surinam with capital structures very different from those we have imagined in the commercialization of technologies like Intel or Bausch in previous business-cycles.     For this to happen, the global capital markets have to have the information required to predict future sources of value and discover new entrepreneurs, but also the discipline and the non-corruption necessary for these companies to grow.      This may lead to entrepreneurial “spikes” in the global economy, where certain regions of the world become collaborative entrepreneurial science centres in the way Silicon Valley did in the past.   The Red Herring Asia list shows many of these new companies and a scale of potential wealth creation with obvious ramifications for the global economy.   The history of economic geography teaches us that even with web communication; geographical regions become hosts to entrepreneurial activities.  People like to socialize, exchange ideas informally,  live in a secure area, feel that they are functioning in a transparent and aggressively ethical legal culture and so zones will become magnets for activities:  Helsinki-Tallinn is one example, perhaps the development of a venture capital friendly zone in  Tianjin  is another,  the Dubai Internet City remains another, and the attempt to build Singapore-Malaysia-Indonesia economic development zones in the Riau islands may be another.  . 


            These may or may not succeed depending on the relationship they have with B-Schools, which remain the driver of so much commercialization of knowledge and the extent to which they develop a legal culture that makes possible economic growth.    But this first trend is exciting.    If Riau and Dubai were really competing to be the new Switzerland of wealth-protection and discipline capital formation, then there would be collateral benefits from all of us from this competition.


            The second trend is more complicated.  In investment banking, the ability to manage the borderlines between economic and politics are precisely what determines successful from unsuccessful activities.    Advocates of free trade have historically been naive about the ways in which domestic economies favour local actors:  the “non –political court systems of the United States”, the capacity to disguise subsidies in defense expenditures in many countries, including the United States and France,   a blame-outsiders mentality which kicks in when there is a crisis .     Consolidation of an international economy requires multilateral processes (perhaps institutions, but certainly processes) which ensure that there are transparent global rules.   This requires a new economic thinking.    Is a   billion-dollar investment from Lukoil the same as a billion-dollar investment from CNOOC or a billion dollar investment from Goldman Sachs or a billion dollar investment from a hedge fund in Connecticut?    One can talk about these questions as much as one likes,  but the reality is two of the past five Secretaries of the Treasury in the United States ran Goldman Sachs, and a third head of Goldman Sachs became a powerful Senator from New Jersey (and is now Governor of that state).   The Minister of Finance in France, Christine Lagarde, ran the Chicago activities of the international law firm Baker McKenzie. 


            This is all to say that the challenge is economics is the same as the challenge in international war crimes trials:  to establish an international rule of law which does not look like an imposition of rules designed by former colonial powers and the United States on other countries in the world.   On the other hand, weak international frameworks which take the lowest common denominator from the legal systems of Denmark, Australia and Equatorial Guinea make no sense in moral or economic terms.    This challenge lies at the heart of many of our concerns about the stability of the international financial system.  Some of us remain enormously concerned about the economic empowerment of regimes like that of Equatorial Guinea, which has the competitive advantage of geographical geology.   The Iraq war and the incompetence of the Bush Administration have served to obscure many of the key trends which need management if the global economy is to achieve stability.     Europe shows the potential in harmonizing the economic systems of Slovenia, Bulgaria and Finland, but also shows the tremendous challenges in doing this without ending up with lowest common denominator decision-making disguised as good-faith multilateral bargaining.


            The framework within which decisions are taking place makes the issues of this course even more urgent: for financial decision-makers, we are constantly assessing risks in various trends and how to position ourselves (in portfolio management, in assessing acquisition targets) in this topography of risk.    The political redesign of the global capital markets will be led by those countries with a stake in transparency because they are knowledge-rich, export-oriented democracies.   A Prague-Helsinki-Ottawa-New Delhi-Singapore collaboration could move beyond a council of democracies to be a steering committee for global financial market regulation.    If we fail to do this, the current trends will lead to a protectionist backlash as suspicion of CNOOC,  Temasek,  Dubai investment activities and the  export of Russian capital leads to , at  minimum, the establishment of different classes of capital in economic activity, and at a maximum, the restriction of foreign investment in generic terms, simply because that seems to be the easiest and superficially most popular policy initiative. 


            A global capital market where Dubai, Singapore, China played by the same kinds of rules as Swiss and Dutch banks in the earlier 20th Century is potentially an exciting prospect, possibly ushering in a long cycle or economic growth and the chance to ameliorate global conditions by creating the preconditions for economic growth in corners of the planet.  Once again, a new generation of decision-makers has to learn that there can be no economic growth without efficient and disciplined global capital markets.   

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Lecture for McGill International Business Students

January 25th, 2007

Over the last few years, I have had the pleasure of giving a number of lectures in this programme.    The case studies have changed and there are shifts of emphasis, but for my own purposes in terms of teaching international business issues in the next era of globalization, there are some themes which are perennial.   So, here are some highlights from previous years.

1.      The new world economy is driven by entrepreneurial value creation.  The development of entrepreneurial finance in emerging markets remains one of the great challenges of the early 21st Century.

2.      Capital markets have to be disciplined and ethical.  There is a correlation between success by the indices of Transparency International coincides directly with economic prosperity.

3.      The “invention” of ethical and fair capital markets in a new economy requires turning remittances, microcredits, debt-cancellation new equity, and foreign aid into investment capital.  If Equatorial Guinea had a pension fund that operated by Hungarian standards, we would not be worried about the transfer of capital from oil companies to the “state” of Equatorial Guinea.

4.      Globalization has produced a new set of pressures on players within the global economy.  Dubai, Singapore, China, India, Malaysia, Kazakhstan are emerging as new sources of equity in global deals.    The harmonization and discipline of the global capital markets will be directly correlated to the growth and expansion of the new global economy.

5.      There are new sources of innovation in the global marketplace:  From Korean films to Russian software, we have learned that innovation is global in scope.   The globalization of innovation transforms the way we do venture capital.

The assumptions that underlie the global economy are different from the way the world was approached five years ago.   Muhammad Yunus wins the Nobel Prize and the international development agencies look much more toward promoting entrepreneurial value-creation.   When I was on faculty at McGill, we had MBA research projects that explored Global Competitiveness strategies in the emerging economy of the early 1990s.  They looked at emerging themes and trends in the global economy:  e.g.  the rise of resource-financed states like Uzbekistan and Azerbaijan in the post-USSR global economy, the rise of Malaysia as a technology centre, the unique role of state-backed financial actors in the global economy, the role of the Canadian financial community as a centre of global mining finance.    These issues seemed esoteric in 1993 but are central to the thinking which makes up capital markets today.


            The arguments for and against globalization in the 1990s and early 2000s have proven to be limited in their understanding of capital market activity.    Both the pro and anti globalization arguments seem dated in the current political reality.   It is refreshing to revisit the globalization debate from the perspective of 2007.

These themes are constant, so as we start 2007, I wanted to talk about the way global energy markets are transforming politics and capital market structures and the way new alliances (e.g. China-Africa) are transforming the phenomenon which we refer to as globalization.   I hope this provides a framework for talking about international business and finance for you and a basis of an ongoing dialogue.

            The new directions of the global economy are characterized by four broad trends which are under-reported in the North American financial media:


(i)                  the rise of new sources of innovative capital in the global economy.   The Mittal phenomenon and Petronas shows new players whose impact is significant;

(ii)                the rise of the Dubai-Singapore and Singapore-Hong Kong capital markets access and the development of new capital markets;

(iii)               the importance of global portfolios as they affect both privatizations and economic growth strategies in China, India, Malaysia,  Indonesia

(iv)              the role of energy revenues in global capital markets.

To figure out the shape of the new world economy, I would like to start with four case studies:

1.  Turkmenistan and Central Asian pipelines.

2.  Dubai and the transformation of energy revenues into investment capital. 


            3.  Remittances and the Haiti economy: a failure to turn cash into productive capital.

4.  New sources of innovation: commercializing Chinese science in Africa: the new global innovation map.

            While western foreign policy-makers are preoccupied with Iraq, China is making a Central Asian/African energy strategy.    Significant decisions about energy production and the transformation of energy revenues into investment capital are being made in Dubai and Astana.  Strategic decision-making at global corporations and portfolio strategies at emerging market funds have to calibrate the changes that are taking place in the global economy.



Turkmenistan gas and the growth that could come from a move to democracy.

A quick look at a map of pipelines in Turkmenistan shows the pattern of wealth-creation in the region of the world which supplies a substantial portion of global energy.    The competition in this region is of extraordinary importance.  Is Turkmenistan oriented toward Turkey or Russia?  Is the Kazakhstan foreign policy of balancing the west, China and Russia viable?    How do pipeline routes affect geopolitics?  A quick look ay the

Baku-Tbilisi-Ceyhan (BTC) pipeline shows why the struggle for political influence in the Caucasian states of Georgia and Azerbaijan has been so critical.  If a Turkmenistan now looking in different directions becomes oriented to different kinds of policies, along the lines proposed by the Turkmenistan Project.   There are new political trends in Turkmenistan which make it of interest given its geopolitical significance.


 I am using Turkmenistan, of course, as an interesting and topical case study.   The changes transforming central Asia and the middle east are collateral effects of the role of global energy production in global capital markets, a relationship always talked around, seldom adequately analyzed in B-Schools (or anywhere else).  Energy markets are transforming the world from Nigeria to Russia.   The new international political economy of energy has set a new framework for global politics.  This lecture will look at how the new politics of global energy can be managed, how it might be mismanaged and where “globalization” of capital markets is in the world post-Iraq.   The emergence of new sources of capital market activity and new sources of investment (Dubai, Moscow), Venezuelan strategies for Latin American development, Gulf strategies for investing in energy diversification will be set up as case studies of the new international environment we are currently charged with managing.

The  strategies for managing the “curse of oil” or the equal “curse of natural gas”, the race for energy resources and the accommodation of new capital market activities in the next stage if globalization will all be addressed in countries like Turkmenistan.  Will Turkmenistan invest its resource wealth in economic development or will it continue the pattern of its recent history?    The next generation of international politics will be invented against this template.

Key trend:   the challenge of building democratic states with efficient capital markets in countries which are resource-endowed remains the single most disruptive geopolitical issue. It affects geopolitical strategy and capital market management and remains a key issue of international business strategy for the foreseeable future.    The development of oil trusts as capital market instruments and the change in the corporate behaviour of energy-producing companies like the Norwegian Oil for Development Initiative remain some of the most important issues in the structuring of the new global capital market.


The rise of Dubai and the transformation of Gulf oil revenues into investment capital:

            Understanding the role of the Dubai oil diversification strategy in global capital markets requires an understanding of some of the relationships realigning global politics.  The Dubai-Malaysia connection is represented in the activities of Mohammed Alabbar  and the development of the Gulf Venture Capital association .  The emergence of Dubai in an extraordinarily short period of time as a knowledge-centre, a media centre with innovations like Dubai Internet City is one of the most transformative cases on the planet. For deal-financing, the transformed capital market structure of Dubai to Singapore has implications for North American investment banking and Canadian business strategies.  For students of international business, understanding the implications of this for the way in which global capital markets will operate is an imperative.

Key trend:   the transformation of energy revenues into investment capital significantly impacts the way deals are structured in the global economy.  The rise of Dubai as an investment centre, the increased role of capital export from energy-producing counties remains a new feature of global capital markets.   This creates new capital markets and strategic alliances between them which will result in different structures for deals in the next decade.  The market for acquisition capital in the PetroKazakhstan case is the shape of things to come.


New patterns in the commercialization of knowledge - innovation is global East African Botanicals.  

A great case study for the new trends in global commercialization of innovation and the political byproducts of China-Africa enhanced relationships is the story of East African Botanicals.    Chinese herbal medicine is a category of investment of considerable interest in the venture capital community.   The structuring of a company which uses Chinese medicine and African agricultural potential to create a company is the kind of case study which illuminates significant new trends in global business.   With Novartis’ acquisition of East African Botanicals, the case becomes even more a global story.

Key trend:  The global economy is now defined by the globalization of innovation.  New companies are being designed around networks which could not be envisaged five years ago.  These relationships are more a part of the complex global infrastructure of knowledge which has developed in the last couple of decades, between research centres in India, China, collaborative research teams in places as varied as Stanford, McGill, Helsinki University of Technology and the kind of deal structure demonstrated by the case of East African Botanicals.


Remittances and the financing of new ventures in a global economy:

            The nature of globalization of labour markets has produced the phenomenon of remittances (transfer of earnings from Somali-Canadians in Toronto to Somalia) as a major source of income in the transforming global economy.   For Haiti,   this becomes the key component of capital market creation.  

Key trend: the complex social networks which are part of the urban character of London, Montreal and Paris are creating economic models which have considerable potential for entrepreneurial activities if remittances can be transformed into productive investment capital.  The mix of remittances, microcredits, pensions paid from energy trusts to citizens of countries like Equatorial Guinea and Turkmenistan in a future will change the pattern of entrepreneurial finance globally.   The emphasis on remittances by international development agencies recently is to be welcomed as this provides a more direct link between globalizing labour markets and economic development.  This can only work for sustainable economic development if there are financial capacities to transform remittances into savings and savings into productive investment.


            The implications of these trends are significant for the new globalized capital markets.   The creation of productive investment for sustainable prosperity requires that these be sources of investment capital is converted into disciplined capital.   The creation of banking systems and financial regulatory systems becomes a prerequisite to effective investment.

            The most important thing for business students is to understand that there are several sources of disruption and opportunity in these new capital markets.  Dubai-Singapore, Kazakhstan-China, Russia-Turkmenistan relations have the potential to be economically transformative.   We are witnessing new sources of deals in the global economy, from the pattern of an Indian entrepreneur like Lakshmi Mittal to buy a distressed asset in Kazakhstan and leverage that into being the wealthiest corporate executive in the United Kingdom.      

            In a global economy, oil revenues are being turned into new sources of capital.   This creates different structures in the global economy.  Saudi investment in Citicorp, the changing pattern of managing the next generation of oil resources, the acquiring ambitions of Malaysia, Chinese, Indian, Dubai and possibly Kazakh investors are all going to change the dynamic of global investment banking and fund management.  I have proposed a Gulf of Guinea investment fund modeled on the Quebec CDP and Senator Hilary Clinton has proposed with Senator John Ensign a variation on the theme in terms of the management of Iraqi oil assets.  These are themes which are going to dominate global business strategies and investment strategies for the next decade.

            For students looking at the mixture of opportunities and trends in today’s global economy, we are seeing new pockets of potential growth.  A slightly more democratic Turkmenistan would not just an opportunity for democratic nation-building but would be an investment opportunity.   The new energy markets are driving capital market structures globally, creating new significant players like Lukoil and Dubai Ports, but also creating new kinds of strategies for Chinese and Indian entrepreneurs.   One of the most exciting business models I have seen recently is the proposal to turn remittances into entrepreneurial finance.  The combination of remittances and microcredits can transform the economic infrastructure of many countries in the world and create the kind of growth at the base of the pyramid that the deservedly influential business professor P.K. Prahalad has analyzed before.   For business strategists, understanding the new sources of growth and value-creation in a global economy is critical.     From Mittal Steel to East African Botanicals, we are seeing very different business models.    Now, I would argue in a business strategy course that this is merely the globalization of a longstanding trend in creative business genius: the transformation of a rubber boots manufacturer into a communications giant and the only non-U.S. company in the top-10 brands in the world (Nokia).  The difference is now that global networks are driving this phenomenon.

            There has been an extraordinary movement along a learning curve in the last five years.    The movement of microcredits from marginal to Nobel Prize winning is a highly visible change.  Less visible is the extent to which a consensus has been reached about the end to poverty, focusing on building civic institutions that can sustain efficient capital markets and a democratic rule of law.      It is a different global economy today with Asia Rising, CNOOC and Dubai Ports being part of the decision-making of a new global economy.    It will be even more different if we learn how to transform new sources of capital into the kind of entrepreneurial finance require to produced sustainable prosperity and end poverty on this planet.


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Updated notes on Oil and Capital Markets

June 11,  2006

           The Norwegian government is trying to develop a sustainable investment strategy for expected oil revenues off-shore from Madagascar.     Norsk Hydro has developed a case study of diversified energy investing.    The investment in Business Schools in Kazakhstan is an attempt to create a high priority for developing the international capital market skills of those managing the next generation of petro-capital.

            The link between environmental strategies, global sustainable prosperity and the management of international capital markets has never been more apparent and urgent.  A recent exchange in the Financial Times drew attention to this issue once more in the context of Madagascar and Norwegian initiatives.    An excellent letter written by Diarmid O’Sullivan and Gavin Hayman of Global Witness describes the Norwegian initiative as “a bona fide attempt to make the extraction of oil and gas more transparent and accountable to the citizens of producer countries”. 

            The next stage of economic development and the management of transparent globalization in the aim of sustainable    prosperity require a serious attempt to invent new financial instruments for the management of revenues from oil and gas production.   The “Dutch curse” or the longstanding impact of petrodollars on corruption is well-understood by decision-makers in public policy areas and by boards of major energy providers.    The challenge is for public policy-makers to invent a new revenue system for the development of efficient capital markets in the newly-onstream oil producer countries.    A democratic post-OPEC building on models proposed before for an EBRD-style African fund capitalized by resource revenues and targeted at entrepreneurial development and the provision of pension-plan style distributive income policy instruments is needed more than ever.

            In the last few months a Gulf Venture Capital Association has development with Malaysian participation.   The African Bank for Reconstruction and Development can include Malaysia , Kazak, Turkish, Indian and Indonesia participation.   The project for the next decade is to build by Transparency International standards the investment banking skills required to ensure that this round of oil development (in Central Asia, the Gulf of Guinea and Indian Ocean) does not produce the complexities with which the global community is dealing today and to ensure that the benefits of commercializing natural resources creates the means for sustainable prosperity in Angola, Madagascar, Kazakhstan and Equatorial Guinea.     This is a foreign policy priority in which Canada as a global resource economy with the opportunity to become an energy superpower has a chance to take a leadership role.     Energy strategists and oil company boards would welcome a formula for ensuring that the resource rents in Gulf of Guinea were reinvested in sustainable prosperity initiatives.   Right now, there is no political leadership for developing that formula.      In this G8, there is an opportunity to establish this as a Canadian strategy for Africa and Central Asia .    Complex as this is in the current foreign policy mix where Chinese energy realpolitik has to be integrated into this mix (which is still another argument for China , India , South Africa , Malaysia , Brazil and Indonesia becoming the G-14); there are incremental steps that can be taken:

(i)                  A Democratic OPEC where young Kazaks and young Nigerians could examine the future of the global economy in terms of investment strategies.  Those adhering to the Transparency Initiative set out by the U.K. government would be members;

(ii)                An African version of EBRD (ABRD)  where capital was formed to provide an African investment bank,  where African MBAs and B-Schools could invest in African entrepreneurs;

(iii)               A separate pool of capital administered as a venture fund by the oil majors to reinvest in diversified economic growth and efficient capital market structures in oil-producing economies.

            Without these frameworks in place, the preconditions for sustainable prosperity will not be created and we will have another cycle of kleptocracy and market distortions resulting from the way petrocapital is used.  It is this intersection between international political economy, global capital markets, international development and geopolitical security issues which requires a new approach to political science and the work being done in global B-Schools.     I hope that Canadian universities take the lead on this in the next year as part of the attempt by this next generation of Canadians to make Canada ’s position as a global energy superpower a launch pad for the next generation of thinking about how Canadians positively influence global society.

            Chip Cummins work in the Wall Street Journal especially his April 10th, 2006 piece As Oil Supplies Are Stretched, Rebels, Terrorists Get New Clout follow the connections between oil and global politics with particular astuteness. 



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Jim de Wilde

Notes for Remarks at Haskayne Business School , University of Calgary

March 17, 2006



            When Dubai Ports World acquired P & O, there was certain symmetry to the deal, the end of one of the most famous, almost romantic symbols of European colonialism and 19th Century globalization.  The next round of globalization started with Dubai Ports World divestiture of its U.S. assets in March 2006.   It involves recognizing many of the weak foundations of the 1991-200x post Cold War globalization.  All capital is not the same; its source matters, both in terms of country of origin and in terms of whether or not it is formed from petro-revenues. 

The   mainstream theory of globalization in the 1991-200x period argued that all capital is the same. It is disciplined by the efficiencies of investment behaviour, opening up markets to greater productivity.   The simplistic anti-globalization argument in the same period was that local capital should not be swamped by large foreign investment whatever its source.  At one level this was the no Wal-Mart argument.   At a more sophisticated level, it was always about maintaining the control of smaller capital markets to control the pace of growth (as well as local interests).   This was the Malaysian argument at the time of the 1997 Asian financial crisis.    Now we are in a different era, one defined by South-South investing and new players in the global economy.   This raises a new suite of questions.

  What difference does it make if the capital is formed not by productive activity, e.g. the commercialization of processed grains and building a multinational like Kellogg’s, the refining of petroleum and building Shell?   What if it is just non-productive capital resulting from resource rents and geological roulette?  How does the concentration of newly-formed capital in the hands of a few oil producers affect the open operations of international finance and the decision-making of global capital markets?     How does petro-capital behave differently than other forms of wealth management?  Oil’s disruptive effectives on global capital markets have been well-documented from Daniel Yergin to Peter Tertzakian.    With Dubai Ports World, it has become centre-stage in the international political world.

            Fluctuating oil prices can be managed by sophisticated hedging strategies in portfolio strategies for institutional investors.    However, in a world defined by private equity activities, steadily rising oil prices have a different impact on capital accumulation in the global market and on liquidity for global acquisitions.    President Bush’s State of the Union address, the “addicted to oil” speech avoided the central paradox of the new global economy: rising oil prices are required to accelerate the shift to new   fuel sources and rising oil prices create strong new dominating players in the global economy while new entrants like China and India are being fully integrated into the global trading system.    The management of geologically-generated capital becomes central to the new political system that is emerging, not in some sinister conspiratorial model of the left where the oil companies are hazardous to economic health, but also not in the way of traditional liberal economists who view the source of capital as irrelevant in their politically naive approach to understanding economic activity.

            Canadians in general and Albertans in particular could play a leadership role to play in the definition of this new global economy.   It is a world where energy investing will play an increasingly significant role.  As a result, it is a world where the long term success of the global capital markets will depend increasingly on how we ensure that petro-revenues are converted into sources of productive investment.  That is the ingredient which has been missing from the global economy the last few decades, in no small part because we just hoped they would be reinvested in London , Zurich , Paris or Wall Street.  The changing world order with the rise of non G8 investors has brought that paradigm to an end.


               The new global capital markets are characterized by the reality that oil has become even more of a political instrument than it was during the 1970s OPEC embargo.   The conversion of petro-wealth into political leverage by the regimes in Riyadh , Tehran , Moscow and Caracas means that global capital markets have entered a new phase and that this phase coincides with security challenges.     

            For international strategic considerations, two innovations are paramount: 

(i)                               The more petro-revenues that can be converted into longterm development capital, the more secure the international capital markets will be;  

(ii)                               International practices need to differentiate between capital that is formed as a result of geological roulette and managed by a state-run organization with little governance as to its rules of investment.    Surely companies that cannot meet regulatory standards should not have the same freedom to invest as companies which comply with Danish or Delaware laws of corporate governance.   

            Calgary is at the centre of Canadian foreign policy in part because Canada is now an energy superpower and energy has become the driving force of global security and global capital market issues.      The vocabulary to describe this is just taking shape now.    

            The Dubai Ports crisis was the first major clash of petrocurrencies and the global capital markets.   The consensus about globalization has been based on the notion that capital is capital and that a Danish company should be able to buy an Bangladeshi asset or a Montana company a Saskatchewan company and that this was indisputably a good thing in a world of opening trade.    This approach to trade was always naïve and utopian.  Many people pointed out this in real time.   The debate about trade harmonization and “fair trade” was understandably discredited by some of its more extreme advocates.   But the question about how compatible products are made in Central American textile factories with no union rights and unionized North American plants ha not been satisfactorily addressed in the public policy process.        Canadians argued about the impact of U.S. investment on cultural industries.   Americans would not contemplate a foreign investor buying media assets as Rupert Murdoch’s case demonstrates.

    The simply reality was that unregulated global capital was always an abstraction.  Now global securities regulators monitor money laundering.  Corporate governance should require the compliance of all companies wishing to participate in the global economy, including Lenovo and Dubai Ports .    Abstract concerns like compliance with international laws ranging from the Endangered Species agreement to labour practices have demonstrable importance in a regulated globalization.   The new   real issue is whether we can address the issues of from what source capital is formed and whether   state-owned companies should be treated differently as they become global players.   By definition, the strategies of a state-owned company are informed by different criteria than publicly-traded companies.   Even more significantly, the availability of acquisition capital to a state-owned firm is different from those who have to raise capital in public markets.   To ignore this difference is to put globalization at risk.   Our conventional framework towards globalization of finance has put these questions on the back burner, focusing instead on how to achieve portfolio performance and how to use foreign investment to enhance productivity in other countries.  It should be no surprise that the anti-globalization movement has gained momentum in recent years.

            Dubai Ports has ensured that we address the question of how we view petrodollar-formed acquisition capital.    We have not addressed the question of state-formed capital in Chinese companies entering the free and regulated market.  We have not addressed the question of private investors like   Prince al-Waleed Bin Talal of Saudi Arabia using capital to invest strategically in western companies.   Is this just another high net worth individual or is the capital different in terms of its source of formation?     Dubai Ports as a case has made this issues a central part of the new international debate.


            Similarly, the economic power of Moscow , Caracas and Tehran which know how international capital markets operate has created a strategic problem for advocates of liberalized trade and globalization?   What if Chavez wanted to buy Disney?   Or Putin wanted state-backed actors to achieve a majority position on a small Tbilisi or Talinn stock exchange.   The nature of oil-formed capital in global markets has dramatically transformed “security” threats.

            What is to be done?    In the short-term, we need to address the source-of-capital issue in more direct terms.   The issue needs to be focused on state-backed firms which distort the market for acquisition capital.    Realistically, this will take a very long time and the result is we will see many more Dubai Ports (or fewer if the petro-capitalists become more inward looking or diverted from the global economy and Chinese state-backed players simply build towns in Angola and Nigeria to be close to the source of their energy).   It is inevitable that there will be eruptions of anti-globalization while the new rules are being sorted out.   However, in the long-run we are building the framework for a global economy and a global capital market in which disciplined and strategic capital will create the conditions for sustainable prosperity in Angola and Kazakhstan as well as Alberta and Denmark.


            In the longer-term, as petro-capital becomes more a feature of the global economy, Canadians can advocate three things:

1.      An alliance of energy-producing democracies, notably Canada and Norway to be able to ensure with the major energy-producing companies that energy production.  There should not be seen as an anti-OPEC, but as a network of democratic oil producers who work with multinational oil companies and oil technology companies (pipelines, infrastructure) to ensure that the disruptions in the global economy in the decade-long move to new sources of energy are kept to a minimum.  It becomes a Democratic Oil version of the G-8, probably talking a lot more than it does things, but important if only because it focuses the agenda.

2.      An acceleration of the energy diversification agenda.    New York Times columnist Tom Friedman has superbly polemicized on this issue.  He doesn’t go far enough and this is also where Canadians can take the initiative with credibility.    It is in our economic interests because we have the knowledge about all aspects of clean energy, grid management, and fossil fuel production.   In designing the hub for Alberta resources, networks established with GE, Shell, Chevron Texaco, Norsk Hydro are critical to the diversification strategy.    In another talk, I am looking at best practices in alternative energy investing (Chevron Texaco, Norsk Hydro, Nth Power).  These relationships and relationships with energy investors like those which exist in the rest of Canada are a critical first step toward ensuring long-term energy stability and removing the Bush Paradox from the global security agenda.  

             3.      Finally, and most importantly, this integrated global economy needs to ensure that the revenues that come from the next round of petroleum revenues is invested in longterm economic development.    By next round, I mean not only the revenues that come as oil moves from $70/barrel to $XX/barrel, but the impact of new players: Angola, Equatorial Guinea, Nigeria, Kazakhstan,Sudan on the global economy.   The commitment that all new petro-wealth be put in the hands of accountable and regulated capital actors.  In short, we need Angolan pension-funds investing in Angolan personal security, not the simple transfer of wealth based on the anachronistic state-to-state transfers who have made countries without policy infrastructures the new superpowers ( Russia , Iran , and Venezuela ).     The axis of oil may be a fact of contemporary life, but the geological heritage of West Africa and central Asia must not become an even further distortion of international investment patterns.   The promotion of a Gulf of Guinea Trust , analogous to the Heritage Fund, the CDP in Quebec or the Norway Trust is one of the most important political issues on the global agenda, not simply for the benefit of African economic development, but for the imperatives of global security.  The international system cannot be expected to manage additional sources of disruption. This could become a cornerstone of the new Canadian foreign policy, which will also be, of necessity and because of knowledge-base more Calgary-oriented than our foreign policy has been before. 

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Finland as a growing investment

July 4, 2005 :     Why Finland ?   A country which ranks first in the Transparency International list of corruption-free countries and also first on the IMD list of competitiveness (no coincidence to be number one on both) is an obvious place for investment.   The same time-zone potential relationship with Israel in terms of complementary technologies and compatible business cultures also suggests on of the more interesting possible economic developments of the early 21st century.

                        The issues confronting Finland now are not just venture capital, but are about consolidating its diverse culture of start-ups into viable global companies and brand.   The technological resource richness of Finland is extraordinary and fits into categories like smart logistics, remote metering for energy control, sensing technologies for pollution control and biomedical devices.

                        Finnish strengths go beyond Nokia and the brand management of Nokia and go to areas like where consumption patterns for broadband and wireless technologies can lead to new strategies for product development that meet the practical needs of consumers.

                        There are excellent venture capital firms, like, and  (now part of the 3i group.    A number of companies have developed capacities which fit into an expanding global product-mix for new technologies in wireless.  Some (her cited to introduce people unfamiliar with Finland to the kind of cutting-edge business models being developed and financed are a few worth following: (wireless video) (logistics and positioning) (video streaming) (enabling technologies)  (logistics)  (logistics)    (wireless entertainment)  (wireless entertainment)

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