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This section contains pieces on contemporary investment strategies and situations in the Global Economy.
Materials from before 2009 can be found under INVESTMENT MEMOs or in the archives or below. Over the last four years, I have coordinated a course on GLOBAL CAPITAL MARKET AND NEW TRENDS IN INTERNATIONAL POLITICAL ECONOMY at the Rotman School of Business at the University of Toronto
Here are the introductory lectures for the last two years:
2009 ARABLE LAND AND TWITTER
2010 ASIAN HEALTHCARE AND BRAZILIAN DIGITAL INFRSTRUCTURE
THE 2020 PORTFOLIO: ARABLE LAND AND TWITTER
Jim de Wilde
October 2009
www.jimdewilde.net
A POSSIBLE 2020 PORTFOLIO
ARABLE LAND
SOCIAL MEDIA
WASTE TO ENERGY UTILITIES IN CITIES
REAL ESTATE (as always)
INFRASTRUCTURE (smart grids, water management)
One way to start thinking about the 2020 global economy is to ask what you would want in the portfolio. Moving forward from today, let’s look at some case studies of the current global economy:
New sources of value: DAEWOO INVESTS IN MADAGASCAR. The Madagascar coup of earlier this year was one of the most important underreported events of 2009. At a time when Canadian mining companies are investing billions of dollars in extractive industries, vanadium and rare earths, Madagascar became the template for a 21st Century crisis that also highlighted the emergence of the Indian Ocean zone. For Daewoo, this was a commercial play on arable land, like Chinese land purchases in Sudan and Abu Dhabi’s investment in Kyrgyzstan. The valuation of the deal produced such skepticism that it created a power struggle within the emerging Madagascar business elites.
The new regulation: Norway to monitor Asia Investments The Financial Times report by Lamont and Ward shows how the Norwegian sovereign wealth fund is trying to monitor corruption and correlate investing with social responsibility. Norwegians are deliberately trying to develop best practices for the management of sovereign wealth funds and to help other countries develop the ability to turn revenues from resource extraction into productive capital. In addition, they are assuming a leadership role in global social responsibility.
New patterns of investment CHINESE-AUSTRALIAN-CANADIAN RARE EARTH MARKETS Chinese investors and the Chinese sovereign wealth fund have become significant players in the global economy. Rick Carew and Tom Wright excellently review this in the September 24th, 2009 Wall Street Journal article “China Sovereign Fund Bets Big on Resources“. The case study of China and the global rare earths market is particularly interesting about new patterns of global extractive resource strategies. Keith Bradsher’s reporting in the New York Times in the September 25th New York Times shows the intricacy of the Chinese mutual dependence on western markets as well as any other single case.
New “stimulus” packages THE $36 TRILLION GLOBAL INFRASTRUCTURE MARKET - WHO PAYS? The Booz Allen report in Strategy and Business in 2007 raised some fundamental questions about how governments “stimulate” economies in a post-Keynesian world even before this global economic realignment. The development of financial mechanisms for infrastructural redesign remains a fundamental driver of the new global economy, in the U.S. stimulus package, in the Chinese domestic investment strategy and as a global pull the building of infrastructure in emerging markets. Infrastructure remains a key driver to the global economy, creating wealth through enhanced real estate valuations and opening up markets (canals, ports, railroads). How this is financed in a world of structural deficits remains a key investment banking challenge.
The constant challenge of valuation – where is the new “value” in the post-internet mobile global economy or put differently TWITTER IS WORTH HOW MUCH? The global economy is being driven by social media and new sources of value unimaginable even a few years ago. The obvious answer is we don’t know how much Twitter is worth, but smart investors think there is a value proposition which makes it worth a speculative investment. It is a bet on a business model and a management team and this becomes a cornerstone of the restructured global economy, trying to link productive capital with emerging entrepreneurial opportunities.
New players KHAZANAH HAS A ROLE NOW, HOW IMPORTANT ARE SOVEREIGN WEALTH FUNDS AND IS THE INDIAN OCEAN A NEW ZONE OF GROWTH? There are some discussions about sovereign wealth funds and SWF strategies generally. They constitute a significant new market driver in the global economy. Khazanah, the Malaysian sovereign wealth fund, is an important case study. Its involvement with Saudi Arabian financial investments and Malaysian involvement in Gulf Arab investors highlights the rise of the Indian Ocean zone (once described as the new Dubai-Singapore network, now seen as more broad than that as Chinese investment enters the Indian Ocean). There are interesting observations on this by Ben Simpfendorfer, a China analyst with the Royal bank of Scotland.
New sources of entrepreneurially created wealth. From Microcredits to new economic players, the emerging markets, there is a process of wealth creation branded as the bottom of the Pyramid by C.K. Prahalad. While some exaggerate the impact of these new sources of wealth-creation, the reality is that entrepreneurially led growth (e.g. Silicon Valley, the U.S. automotive industry in the 1920s, the economic geography of southern China, the mittelstand companies of Germany) has created demand in previous eras of economic restructuring. One can only imagine the impact of thousands of entrepreneurs from Sao Paolo and Hyderabad will create new patterns of growth in the global economy.
In the first class, I briefly talked about driverless subways in Dubai and tea markets in Mombasa. "Driverless subways" is a case study of new infrastructure investment and fundamental innovation in the global economy. . "Mombasa tea markets" is a case study of the rise of new financial innovations in the “South”. If we navigate through these seven current themes, we can try to define the vectors of the new global economy.
We are dealing with a global economic realignment right now. In trying to figure out the financial events of the last year and the contours of the global restructuring which this black swan has brought us, we need to put out a few markers. Much of the discussion is driven by either focus on regulatory failure or concerns about short-term financial market performance:
(a) The first analytical framework perceives a regulatory failure that brought about the crash of the global economy (“the patient was healthy before the accident”). While I think there is an exceptionally important discussion about regulatory failures, I often think that this debate serves to create an illusion of control in the United States in particular. If only “we” had regulated more efficiently, we wouldn’t be in this mess. The regulatory issues are real and compounded the crisis, but the underlying problem was the failure to recognize the shifting of tectonic plates in the global economy.
(b) The second analytical framework focuses on current stock market performances, whether or not recovery looks like a “w” curve or looks like a traditional recession. This too is obviously very important, because we all live in the short term and are trying to calculate portfolio strategies, availability of expansion capital in capital markets and domestic economic confidence. However, this discussion all too often takes place within the same economic paradigm which failed to predict or understand the events of last year, economic modeling of recessions and market corrections. The realization of this is the reason so much economic analysis sounds tentative at this time.
What we need to do is understand that there is a very different process of value-creation in the world coming from this global economic realignment (GER). The point is not to understand it, but to design it. So the purpose of this lecture is to (a) provide a relief map of the realigned global economy and (b) look at the role of B-Schools in designing new models of wealth creation within this relief map and (c) briefly address some of the questions of global governance within this realigned global economy.
First, let us look at some of markers in the new global economy. We should have known, and some did, look at the hedge fund managers who shorted U.S. banks between December 2007 and the collapse of Lehman brothers in September 2008, that the combination of U.S. indebtedness to China as a result of the mismanagement of the U.S. economy during the tax-free prosecution of the Afghan and Iraqi wars and the development of significant new pools of capital as a result of Globalization 2.0 (1997-2008) had led us into a number of high risk activities. When Bob Rubin successfully negotiated in December 2007 the $7.5 billion Abu Dhabi Investment Authority investment in a restructured Citigroup, we should have known.
Second, the global economic realignment does require new rules of governance. That is what the Pittsburgh summit was all about. The challenges ahead for it are how to finance infrastructural changes globally (driverless subways) and coordinate the new economic realities (Mombasa tea markets) with international rule of law? I think that if you hold these two challenges in mind, the next few years look more comprehensible and the agency required to create the preconditions for a different form of global prosperity seem more attainable. (In writing this lecture, I reviewed Brad Setser’s blog from his days at the Council of Foreign Relations before becoming joining President Obama’s National Economic Council. It remains helpful background reading).
New sources of wealth are created by designing new forms of digital media, by commercializing our medical histories, by improving the productivity of agricultural lands. The tectonic plates that have started to shift in the last year show the need for new financial architecture to reflect new patterns of growth. This architecture will evolve in ways we are just starting to understand. Some of it will fit into categories that are familiar to us: harmonization of securities law, compliance with tax-enforcement. Some of them will be completely new: the validation of entrepreneurs through some form of social media like Kiva. It is possible to imagine a model of entrepreneurial growth where microcredits are allocated via mobile telephony and validated by a social media network attached to a Twitter like business model. There will be new businesses around rare earth mining (scandium, vanadium are not household words, but they transform our concept of usable materials). In other words, innovation will take place as it always has once we decided on the new sources of value.
The geopolitics of this will challenge us as we realign capital markets with new political realities. By simply Googling “China String of Pearls Map”, I came up with an interesting blog from a PhD student at Durham in the U.K. The focus on the Indian Ocean zone is obvious to anyone looking at global politics today. From Somalia to Indonesia, Indian, Chinese, European and American interests are being redefined and the new players in the zone create a very different global capital market, because this is where much of the new global wealth is being created and traded .Bob Rubin could have asked for $7.2 billon from the Chinese, but they would have had a very complicated decision-making process on whether they would have been interested. If the Citigroup restructuring had been done that way, we would have been more quickly aware of this shift of power to the emerging markets, the BRIC countries and more (Malaysia, Indonesia).
ASIAN HEALTH CARE AND BRAZILIAN DIGITAL INFRASTRUCTURE
Growth in the Global Economy in 2011
Jim de Wilde
jdewilde@ca.inter.net
www.jimdewilde.net
October 2010
GLOBAL CAPITAL MARKETS AND NEW TRENDS IN INTERNATIONAL POLITICAL ECONOMY
PART ONE - COURSE INTRODUCTION
There is a great deal of pessimism in the non-Asian English-speaking capital markets right now. There is a great deal of optimism in the Portuguese, Mandarin-speaking, Indian capital markets right now. We are in the middle not of a recession but a global economic realignment with new rules, opportunities and economic paradigms.
Imagine a world in 2015 when a consortium of a Madagascar sovereign wealth fund, run on Norwegian standards of fund management and transparency based on Indian Ocean oil revenues combines with a Gujarati entrepreneur who has diversified from film investments into a digital services conglomerate and a syndicate of North American private equity funds purchases Canada’s leading agricultural technologies firm founded in 2011 with the profits from the sale of Potash Corporation to XXXXXX.
Imagine a world where CAT-fund (Canadian agricultural technologies fund) in 2015 backed by a consortium of Canadian institutional investors, Norwegian and Abu Dhabi sovereign wealth funds and the new Brazilian Heritage Protection SWF (formed in 2012 to pay for preservation of Amazon rainforest) invests with Novartis in an African health care company formed in 2011 by a group of Malian and Nigerian B-School students in London and Montreal.
Imagine a global economy in which there was a corruption-free Nigerian capital market. Atunma Oteh is not a household name in North America, and the Nigerian stock exchange is still a difficult place in which to frame an investment strategy, but just imagine if the petrodollars being turned into productive capital through that exchange were being invested productively.
The investment in next generation technologies and practices has driven capital markets for centuries. From the Suez Canal to the Baltimore and Ohio Railway, the political economy of new technologies will drive capital allocation in the next decade. Some of this is obvious, e.g. the investment in alternative energy technologies by institutional investors on a global scale. Some are less obvious: Unilever made a multimillion investor in Solarzyme, a company that produces palm oil substitutes from algae.
There are new rules and new strategies.
The reconnection of wealth and value creation suggests that there is a boom ahead in the global economy in 2011-2020. This may not be good news in Gary, Indiana where restructuring has been delayed by a profound misdiagnosis of the problems in the American economy. However, it is terrific news for globally oriented entrepreneurs in Silicon Valley, strategic hedge funds engaged in value-adding restructuring of organizational capacities in growing markets and well-governed political economies where intellectual capital is organized and focused on emerging growth opportunities.
These are Schumpeterian moments and economies which lag behind with poor educational systems or obsolete economic ideas will not be the most prosperous in the world in 2020. I don’t mean to be sanguine about this, but if you contrast the English-language media of Singapore with Toronto or New York and see the capacity of North American debate to be distracted by trivial and incorrect analysis, one sees what has to be done to change direction.
Let us start with the Stiglitz-Sen initiative on new measurements to replace GDP. We all know that quality of life is a significant component of all our personal measurement. The best days can be ones were we spend $2 on a Red Sea beach and some of the worst when we spend hundreds in an airport hotel. Great political economists have understood this. Great political economists remind us of that today.
We are moving away from “transactional” capitalism and moving towards “relationship” models of investing. But even if the so-called “Anglo-Saxon” model of market capitalism is replaced by a “Nordic model” in many visionaries, there remains a new issue for B-School to address as we try to imagine portfolios for the year 2020. How do we define value?
Gold has value because we accord it value. Real estate has value and is the underpinning of most capital markets. In the new global economy, arable land has a value because food security is a concern and agricultural productivity is a solution. In the new global economy open-source flexibility in managing the innovative potential for the digital age has value and the technique for validating the opinion of crowds suddenly has enormous value.
The global economy has some fundamental new features, which I will address today. It also requires that you design new instruments to create value and design efficient capital markets consistent with the new political economy of value creation. That will be the new leadership in B-Schools around the world and in the private equity firms and hedge funds that are invented to perform these tasks.
PART TWO ASIAN HEALTH CARE AND BRAZILIAN INFRASTRUCTURE
Khazanah is not a name familiar to most Canadian undergraduates. It is the Malaysian sovereign wealth fund. It has just transacted a $4.5 billion deal to create a regional health care company involving India’s Parkway.
Pernambuco is not a name familiar to most Canadian undergraduates. It is the Brazilian state whose infrastructure demands energize the development of northeastern Brazil.
The changes we are seeing in the global capital markets reflect a new creation of value, the value of knowledge of tropic plants in medical treatment, the value of design in adding value to urban spaces increasing real estate valuation as well as increasing environmental sustainability, the value of microcredits-backed entrepreneurs creating thousands of new businesses commercializing appropriate local knowledge.
Even those who have been critical of globalization and the allocation of capital in the old period of Globalization 2.0 will have to recognize that we need disciplined capital markets allocating resources to the cornerstone enterprises of the 2020 portfolio.
The transfer of revenues to purchase extractive resources has to become part of this new global value-creation. The best minds of this new business generation have to design models for internet-coordinated venture capital that ensures entrepreneurs have access to mentoring and capital on their mobile phones. The best minds of this new business generation have to design institutional investors that convert resource wealth into productive investments.
The reform of the regulatory regime that had oversight on Globalization 2.0 is important. But the new global economy has to have financial instruments that smoothly allocate capital. The portfolio of 2015 will see some more Twitters, the investment in agricultural productivity in arable lands, the enhancement of real estate valuation through environmental design. But it will also see the transformation of resource wealth from an “oil curse” to a source of institutional investment payable as part of a global welfare state as pensions to the stakeholders of the region.
The best world of 2015 has a Madagascar pension fund ensuring investment in restructured Ontario assets. The best world of 2015 has a syndication of microcredits from Shenzhen, Bangalore and Johannesburg into a suite of new entrepreneurs in Kabul, Tikrit and La Paz.
The politics of this are already taking place in the thirty-somethings around the world who are sharing best practices in new entrepreneurial activities. The economics are more complicated. Some of the issues of Globalization 2.0 have to be remedied, i.e. transparency, accountability, disbursements of profits in a manner which ensures that globalization is not associated with the polarization of income distribution.
The intellectual tasks are defined in a business school. Ideas do matter. Norwegian and Chinese sovereign wealth funds backing new value creation in Brazil is the ideal. The profits are disbursed to the stakeholders, the depositors in the pension fund/SWF you will design.
Syndicated investments in new projects, a Kurdish film backed online by small investors who become the technological microcredits finance of the 21st Century is now a possibility. We can validate, perform due diligence.
The new global economy requires that two underlying principles be reaffirmed at every opportunity.
(a) The need for productive long-term capital investment through efficient capital markets trumps all other economic reforms. A Nigerian pension-fund, a Kazakh venture capital firm, the encouragement of Brazilian, Indian and Chinese investments in restructuring manufacturing assets are all achievable objectives if we take the Extractive Resources Transparency Initiative seriously and demand more of it. The Norwegian model, the model of the Alberta Heritage Fund for transforming resource wealth into longterm productive capital is the alchemy needed to make the global economy work. Without it, without global institutional investors, this new global economy will take a ragged form, marked by interruptions and idiosyncratic investment decisions. The goal is not just to change the way we look at GDP, but to look at the indicator of how much of the world’s capital market is invested by the standards of the best institutional investors.
(b) The “best” institutional investors also succumbed to the quantitative maladies of the 2000s. The second part of new global value-creation is to ensure that there is a global venture capital capacity. This is being done brilliantly by innovations in the microcredits market. But there is another challenge in the commercialization of global knowledge, the transformation of ideas into value. That is the question how we validate business models from Tunisia or Zambia, how we
syndicate investment in entrepreneurial efforts in smaller capital markets. The internet economy creates that opportunity as never before. “Bundled microcredits” becomes strategic venture capital. The fusion of the web economy and transformative economic development remains the most important part of the moment we are living through.
We are just at the beginning of a global expansion of growth. It will not happen (relatively) smoothly unless global political and financial leaders focus on the new pattern of global value-creation and escape the ancient categories of “state” and “market” for frameworks that reflect the new realities and the new opportunities. We have to measure quality of life in GDP, but we also have to measure capacities for long-term transformations.
The core problem with contemporary market economics is the disconnect between value creation and compensation. Capitalism works on a very simple moral principle: the creators of wealth should enjoy the benefit of their risk-taking. Across the world, phrases like “crony capitalism” and “casino economy” have come to reflect a cynicism about market economics.
PART THREE SOME BACKGROUND ON GLOBALIZATION 1.0 AND GLOBALIZATION 2.0
For twenty years, there has been a debate about the relationship between value-creation and profits. It underlies much of the debate about Globalization 1:0 (from the end of the Cold War in 1989 to the Asian financial crisis in 1997). It is reflected in a number of issues about value investing and global economic growth in the 2001-2008 period (Globalization 2.0) and the misleading discussions of “corruption” which were most famously characterized in that period by the Enron collapse.
Twenty years ago, much of this was understood. Business Week had a cover story on “THE CASINO ECONOMY”; Richard Ellsworth wrote in the Harvard Business Review in 1989 about the dangers of “short-termism” and the short term characteristics of U.S. (Now Anglo-Saxon capital markets) were seen to be a liability in the competition with an Asian superpower (at that time Japan). But when the Japanese bubble collapsed and Japan ceased to be a threat, the trends towards short-termism and casino-driven quantitative “systems” went unchecked.
What people forget in that period was that it is easy to make money in a rapidly-growing market. Homesteading in Kansas did not require strategic skills, just as real estate development in central China does not require anything other than access to the property entitlement system of the day. There are many interesting questions that should be asking:
(i) how much money was made and by whom in underperforming the market in the 1991-2001 and 2001-2007 period. Please remember that the principle of a never-correcting market was the underlying rationale for the U.S. home ownership strategy that led to the precipitous 2008 mortgage-securitization trigger for what has happened to the global economy;
(ii) in globalization 1.0 and 2.0, how much wealth was created by simply allowing the Karachi or Jakarta stock exchanges to monetize positional goods in Pakistan and Indonesia?
The principles of the new global economy are being reshaped by decisions as we talk. I want to set the stage for some of these new principles by revisiting introductory lectures of 2008 and 2009 for this course on Global Capital Markets and New Trends in International Political Economy.
First, and above all else, we are living through not a recession, but a global economic realignment. China was already in international terms creating a banker-debtor relationship with the United States by 2004 and one of the great failings of our otherwise remarkable system of open democracy was that even though this issue was raised in that year’s Presidential Debates by Senator Kerry, most people were either indifferent or oblivious.
The move towards new sources of economic power has proven to be rapid. The Chinese buying binge on resources and the role of Temasek and the Abu Dhabi Investment Authority in the new world of sovereign wealth fund led capitalism has shown this realignment, In 2007, when former Treasury Secretary Bob Rubin negotiated ADIA’s bail-out of Citicorp, the relief-map of this global economic realignment were there for all who wanted to see to see.
Second, the models of Anglo-Saxon democracy were dubious in real time, but as with mediaeval theological rituals, when the sun continued to rise, many people assumed the incantations were working. The cumulative effect of these economic models was to create a profound cynicism about the agencies of capitalism. When the time came to reconnect value creation and compensation, pro-market economic actors were left with three visible functioning models for economic wealth-creation:
(a) the much discussed Nordic model, which is a combination of a well-managed welfare state that facilitates rapid adjustment and a capital market that is defined by being insulated from the wild fluctuations of globalization (massive capital import from China or Russia or any casino-winner. The model continues to be viable but the question as to how exportable it is remains a critical part of contemporary political debate;
(b) the Silicon Valley model of wealth-creation, one of the most successful economic models for creating value in human history, which succeeded by directly linking compensation to performance and for many years resisting strenuously the importation of east coast economic models into the venture capital and private equity led wealth-creation exercise that created Cisco, AOL, Google and a thousand other smaller varieties;
(c) the microfinance model of creating a billion entrepreneurs in Bangladesh, China, Morocco, which promoted a new pattern of growth incrementally but by aggregating millions of wealth creators. We see today in the oversubscription of the Indian microfinance firm SKS Microfinance the new global capital markets learning from this experience. From the Nobel PEACE Prize (not Economics Prize) to Mohamed Yunnus and the work of C.K. Prahalad, Iqbal Quadir as head of the MIT Global Entrepreneurship lab , Tarun Khanna’s A Billion New Entrepreneurs and the popularity that book has engendered in South Asia, we see a new model.
When looked at this way, from Singapore, or Bamako, or Jakarta, or Saskatoon, the world financial crisis is not as portrayed in the short-termism and twitter-speed of media “analysis”. The U.S. is going through a long-delayed correction, wealth is being generated in many new places on the planet, well-managed economies are outperforming the marketplace, new growth is being created and Business School professors who talked about “markets” in which wealth is disconnected from value-creation are (with luck) unemployed.
PART FOUR A HISTORY OF THIS COURSE FROM LAST YEAR ARABLE LAND AND TWITTER
A year ago, I talked to this class about new value creation. I used the title “ARABLE LAND AND TWITTER”. In the intervening year, we have seen Canada’s Potash Corporation become the centerpiece of global capital market activity because of its unique capacities in value creation. We have seen Hewlett Packard and Dell compete for 3PAR to position their companies for a dominant position in cloud computing as the information economy restructuring. We are seeing an enormous expansion in the global economy as capital is redeployed to restructure the global economy. This is not a recession or a depression. It is a massive redeployment of capital. I used two case studies last year of DRIVERLESS SUBWAYS IN DUBAI and MOMBASA TEA EXCHANGES. Both show the rise of a Second World pattern of economic growth, where Dubai sets the standards (and despite its real estate correction, Dubai will remain a central part of the new global economy. As a friend of mine likes to say with charming simplicity “ just look at the map”) and Honey Farms in Kenya are a part of the new growth from microfinance-backed entrepreneurship which when aggregated creates a significant new asset category for global investors.
PART FIVE BIBLIOGRAPHY OF ARTICLES ATTACHED
For next week’s readings, I want to step back from these case studies and look at some of the analysis of contemporary political economy:
NEW ECONOMIC PARADIGM
Julie Creswell NYT on quant funds. Creswell’s reporting shows the decline of quant funds in the current economic environment and documents attempts to adapt them to new economic circumstances.
Julie Creswell also has an excellent piece on the surplus (sic) of cash in Wall Street hedge funds as investors look for different strategies in this post-GER (Global Economic Realignment) paradigm. The graphic is particularly useful.
Taleb’s pessimism lures CIC as an investor WSJ. Jenny Strasburg’s reporting of the CIC interest in Taleb’s Universa fund. Also look at Jane Kim’s reporting on Universa on how to profit from the next ‘black swan’, one of the most important investment metaphors in current jargon.
Landon Thomas’ assessment of the “economic pessimists” is an excellent overview.
Mohamed El-Erian of PIMCO’s piece on why the growth vs austerity debate is not relevant is essential reading for investment analysts and public policy makers.
Warren Buffett is looking for a successor. This could be someone like Li Lu according to
Susan Puliam’s reporting in the WSJ. As one is looking for models of new post-global economic realignment investment careers, this is an excellent article.
Alan Murray’s End of Management is essential reading for B-School students.
Sebastian Mallaby’s piece on Paul Romer in the Atlantic is a long, complicated article but may contain some of the most insightful thinking about new economic paradigms around today,
CASE STUDIES
Khazanah trumps Fortis in bid for Parkway.
Rabobank invests in Asian agriculture. Rabobank, one of the world’s most innovative financial institutions and long a leader in agricultural investing demonstrates an strategy to operationalize of the ARABLE LAND investment thesis.
Chinese investment in Argentine infrastructure.
Jane Kim’s reporting in the WSJ on frontier investing is very well-done. Also, see
Renaissance and Africa. For the Russian fund, seeing Africa as a frontier market is a very interesting investment profile.
Syrian real estate and the transformation of Syria-Turkey-Iraq-Iran as an economic zone. The Hen-Tov and Haykel piece in the NYT on Turkey-Iran also sets a geopolitical framework.
Oil groups urge Indian sovereign wealth fund.
Gulf states leading on clean energy fund
The speech KOREAN FILM, KAZAKHSTAN OIL AND GERMAN INVESTMENT ON THE TEHRAN STOCK :::::
EMERGING MARKETS AS SOURCES OF INNOVATION was given in January 2006 at McGill in the introductory course on international business.
In the memos section, the following material can be found:
June 11, 2006: NORWEGIAN ENERGY STRATEGIES AND SUSTAINABLE GLOBAL PROSPERITY Updated notes on Oil and Capital Markets
March 17, 2006: PETROCAPITAL, GLOBALIZATION AND MANAGING THE IMPACT OF OIL PRICES ON CAPITAL MARKETS which was based on remarks given in Calgary at the Haskayne Business School
July 4, 2005: FINLAND AS A GROWING INVESTMENT –WHY FINLAND?
The speech KOREAN FILM, KAZAKHSTAN OIL AND GERMAN INVESTMENT ON THE TEHRAN STOCK :::::
EMERGING MARKETS AS SOURCES OF INNOVATION was given in January 2006 at McGill in the introductory course on international business.
In the memos section, the following material can be found:
June 11, 2006: NORWEGIAN ENERGY STRATEGIES AND SUSTAINABLE GLOBAL PROSPERITY Updated notes on Oil and Capital Markets
March 17, 2006: PETROCAPITAL, GLOBALIZATION AND MANAGING THE IMPACT OF OIL PRICES ON CAPITAL MARKETS which was based on remarks given in Calgary at the Haskayne Business School
July 4, 2005: FINLAND AS A GROWING INVESTMENT –WHY FINLAND?
KOREAN FILM,
KAZAKHSTAN
OIL AND GERMAN INVESTMENT ON THE TEHRAN STOCK
EXCHANGE:
EMERGING MARKETS AS SOURCES
OF INNOVATION
International Business Trend Lecture
Desautels School of Management, McGill University
January 20, 2006
The dramatic reshaping of the global political economy since
the 2004 U.S. Presidential
election has produced one of those moments which in academic
environments are called a paradigm shift. This
tribute to Thomas Kuhn’s sociology of science is often overused,
but in this case is completely on target.
Current cutting-edge thinking
in both business and investment banking analysis reflects
this need to operate within a different paradigm.
The new environment consists of a number of political trends,
most significantly the rise of the so-called “South” as
a source of capital, innovation and a different perspective
on the global economy. In a way it is tempting
to call this era “post-globalization”.
It involves a different perspective on U.S.
political economy. In a “flat world” , to borrow
Thomas Friedman’s phrase, innovation can
come from everywhere. In point of fact, as Linux demonstrates,
that has been the case for a while. It is just
that under the old paradigm, it was the U.S.
capital markets that created the most significant commercial
applications from open-source software. Under
the new paradigm, that may not be the case the next time.
These changes need to be
understood by both corporate strategists and investment
analysts. International business strategy is
dealing with issues like the rise of “Chindia”, the emergence
of environmentally-driven strategic thinking, the significance
of microfinance and entrepreneurship-led growth, and the
role of multinational companies as global investors in new
technologies. These are new “disruptions” and
“patterns of hypercompetition”. (*)
For example, Pepsi-Cola
acquires relatively low-quality agricultural land in Inner
Mongolia to supply its Chinese Burger Kings with domestically-produced
potato chips (http://www.truthabouttrade.org/article.asp?id=4964) , mining
companies become instruments of building social policy infrastructures
in African mining communities, consumer goods firms tapping
local expertise for new products ranging from herbal remedies
to new confectionaries.
The entire post-globalization
paradigm is disruptive of conventional investment and corporate
strategies. It opens up opportunities for innovative
strategic thinking and insures that international businesses
operate with new strategic designs. Strategic
innovations of this kind are developing a framework
in a manner that is appropriate to the post-multicultural,
liberal cosmopolitan world of the 21st Century
we are in the process of inventing.
I have been trying to articulate the significance of this
for Canadian foreign policy in the last few months, focusing
on how Canadians can make concrete our unique post-multicultural
global perspective and produce a democratizing formula based
on liberal cosmopolitanism. Today, I would like
to turn to some of the issues as they affect the world of
investment banking and international business.
In previous lectures in the McGill International Business
class since the 2004 U.S.
election, I have emphasized:
1. The need for a new economics of oil,
ensuring that the wealth that comes from the Gulf of Guinea
and other new sources of oil does not produce another round
of petrodollar-fueled authoritarianism which precludes growth
and disrupts the efficiency of global capital markets.
The need for an African equivalent of the Quebec based Caisse
de Depot, providing pensions and a long-term investment
strategy is crucial in this regard.
2. The importance of Transparency International
(www.transparency.org) as a necessary condition
of the development of sustainable prosperity.
Without a political culture that stigmatized corruption,
capital cannot be allocated in a manner that provides the
possibility of the end of poverty.
3. The importance of the work of de Soto and
Prahalad in emphasizing the role of microfinance in ensuring
entrepreneur-led growth in the global economy.
The development of models of microfinance as a connection
between B-Schools and international economic development
is receiving more attention at the World Bank and in the
intellectual world of B-Schools where so much of the thinking
about the future is talking shape.
Today. I want to add a fourth trend in the global
economy, the rise of the “South” or emerging growth markets
as a new source of intellectual capital, financial capital
and strategic innovation.
THE POLITICAL ECONOMY
OF OIL AND WHY OIL AND GLOBAL CAPITAL MARKETS CONTINUE TO
BE A MOBIUS STRIP – AN UPDATE
In 2050, oil will be a relatively small part of global energy
supply. The strategic plans of Chevron
Texaco, Shell, Norsk Hydro all involve substantial allocation
of resources to investment in the disruptive technologies
which are going to determine future patterns of energy management
and energy supply. But 2050 is a long
way away.
In 2006, oil has the potential to disrupt business plans,
change capital markets and reallocate economic power through
the geological roulette of oil exploration. The challenge
for Canada as a world-leading oil and gas supplier and as
a world leader in investing in diversification of energy
supply is how to play a political role in global geopolitics
which insures that we do not repeat the Frankenstein’s monster
story of Saudi Arabia, and how to play an economic role
which advantages legitimately the interests of Canada’s
world-class oil and gas sector companies.
It has become a commonplace in international political circles
to talk of the curse of oil. The Venezuelan, Nigerian,
Azerbaijani and, obviously, Saudi Arabian economies have
become classic examples of economic systems with inefficient
investment strategies because of the way oil revenues can
be used to compensate for other economic mistakes.The Russian economy similarly
has the challenge of balancing oil and democracy.
This has significant ramifications for the pattern of private
capital allocation in the global economy, and remains one
of the critical ingredients of international business strategy,
both in a direct sense (oil as investment) and in an indirect
sense (the investment strategies of the holders of petrocapital
have a distorting impact on global capital formation).
Where Canada
can assist globally is in facilitating the creation of economic
systems that balance oil and democracy in regions
like central Asia and the Gulf of Guinea.
These oil producing regions are going to have the same economic
challenges as faced the Persian Gulf and Arabian Peninsula
oil-producing countries over the last few decades.
The challenge is to ensure that oil wealth is reinvested
for regional social and economic projects, that it is husbanded
for a patient development strategy in the manner of the
Alberta Heritage Fund and the development of an oil-financed
Norwegian capital market.
The issue is made current by the global preoccupation with
the way a small unaccountable group of decision-makers have
spent Saudi oil revenues and by the focus on the political
infrastructures of states like Equatorial
Guinea and Sao Tome e Principe which
are going to become prime beneficiaries of massive oil revenues.
Could Sao Tome or Equatorial Guinea
ever become a mini-Norway or an Abu Dhabi, or will it become
an unstable kleptocracy or an erratic player in the global
economy, a Zaire
under Mobutu, or a Sudan
or a Zimbabwe or
a Saudi Arabia?
These concerns are much on the minds of boards of directors
and managers of major oil companies. They also
constitute a key part of the strategic thinking of international
development agencies and investment banks looking at new
patterns of capital formation and investment structures
in the new global economy. Increasingly,
they also are on the minds of foreign policy decision
makers, now all-too-familiar with the implications of oil
revenues falling either into the hands of a small group
of individuals (the Russian model) or into mischievous hands
that are contrary to global prosperity (the Saudi tragedy).
A neat case study is reported by Uchenna Izunda in the September
7th, 2004 Financial Times. It concerns
oil exploration in Mauritania.
He quotes Driss Amal, the senior commercial officer at the
British consulate in Morocco
as saying “(m)ost Mauritanians in the street are convinced
that oil will not make them rich but will force the country
to modernize itself by upgrading infrastructure, develop
new routes and supply water and electricity to the population.
They also hope all revenues will bring changes to the country’s
banking system”. He contrasts this with
a quote from Arvind Ganesan, director of Human Rights Watch,
concerned that oil revenues “could be used to entrench and
enrich the country’s government at the expense of the population
and efforts to democratize.” The issue repeats and
grows in significance for the way we understand the international
system.
To revisit the themes of previous lectures, there are two
keys to creating the conditions where oil and democracy
could be balanced:
(i) The transfer of revenues to an investing
structure, modeled on a pension fund like the CDP in Quebec,
where the benefits of oil and gas revenues are used for
the beneficiaries of all citizens of a country, a region
and a continent. In the Gulf
of Guinea, this presents a challenge to the collective international
investment community. Obviously one hundred
thousand citizens of Sao Tome e Principe, a microstate,
should not be the sole beneficiary of the oil bonanza.
But the rules of geological roulette and property rights
entitle them to a disproportionate share.
The shareholders of an African version of CDP may be unequal
(the Gulf of Guinea states having larger shares than other
African states), but surely the commercialization of geological
fortune in the Gulf presents an opportunity to provide a
capital base for all of Africa and reverse the effects of
colonization.
(ii) Oil revenues provide an opportunity for the international
community to concentrate the expertise of African financial
managers on a project like an African CDP.
The collateral benefits of this go beyond the immediate
oil bonanza and to the goal of creating an African indigenous
capacity for investing in new African ventures.
The Canadian role in this requires a fusion of our expertise
in energy management, international development and financial
education and our foreign policy imperative of facilitating
democracies before the exercise in “democracy-building”
becomes a crisis.
The opportunity to focus a national strategy on a goal like
this also deserves underlining. Instead of picking
on a winner like the Calgary Oil Patch, the federal government
can use its international credibility to expand the role
of the players in a world-leading sector to secure a larger
role in a geographically-defined set of opportunities.
In the short-term this requires a coordination of initiatives
from natural resources policy, international development
policy and foreign policy to ensure that Canada’s
unique capabilities in this area are not underutilized while
we are designing the new rules for the global economy.
THE NEW SOUTH IN TERMS
OF NEW SOURCES OF INNOVATION
SOME ILLUSTRATIVE CASE
STUDIES OF THE NEW POST-GLOBALIZATION PARADIGM FOR YOUR
CONSIDERATION
New trends are reflected in critical case studies.
In 2005, a new trend was the competition between Indian
and Chinese oil companies for ownership of a Canadian company,
PetroKazakhstan, formerly Hurricane Hydrocarbons,
the focus on microfinance as a development tool led by entrepreneurs,
the emergence of new stock exchanges with different patterns
of capital allocation especially from Dubai to Singapore.
In addition, the focus of analysis turned to new inventive
sources in the emerging markets: the global film industry,
particularly Korea ,
and the rise of India
and China as
sources of scientific innovation.
Central Asian oil:
http://www.atimes.com/atimes/Central_Asia/EL25Ag02.html (the competition for access to the Central Asia
resource economies, especially Kazakhstan, demonstrates
the new economics of oil and the creation of new sources
of capital which will have significant impact on the investment
pattern of the global economy in the next decade.
The India versus China competition for the Canadian created company
PetroKazakhstan may be the case stuffy of the year in international
business).
Microfinance: http://www.tufts.edu/microfinancefund/ , http://www.acledabank.com.kh/ (the focus on microfinance as an instrument
of economic development has led to a number of innovative
initiatives in the area of web-facilitated social entrepreneurship,
ideas of pooling the resources of various diasporas and
focusing their energies on doing more than sending remittances
as part of the capital formation process in the countries
of origin.. Backing microfinance offers ways to circumvent
institutions which are obsolete and calcified in terms of
their operation.
Tehran Stock Exchange:
(the central importance of Iran is revealed in the development
of a stock exchange with ties to European sources of capital.
Right now, this seems to be an attempt to keep functional
capital markets on life support as the Iranian
political system clears up the infected wounds of the last
three decades. Nevertheless, it shows some significant
trends in the new post globalization world economy). http://www.payvand.com/news/02/oct/1084.html In this new world, there will be
new key strategic players, e.g. Petronas (www.petronas.com.my)
Korean film in China:
http://www.iht.com/articles/2006/01/02/news/korea.php (the rise of South Korea as the cultural
exporter in film and music into the Chinese market is both
an interesting global business case study and illustrative
of the pivotal role of cultures positioned to be transmission
instruments for modern communications technologies.
Bollywood is a similar case study but with a less dramatic
and strategic export strategy than the Korean film industry.
New Sources
of Intellectual Property: http://www.demos.co.uk/projects/currentprojects/atlasproject (the “South” is now a source of intellectual
property with corresponding implications for the way
we assess innovation in everything from industrial ecology,
land-use planning, nutritional medicines, software
applications). In health sciences, there are new patterns
of innovation, represented by the case study of East African
Botanicals http://www.npicenter.com/anm/templates/newsATemp.aspx?articleid=12640&zoneid=22
From the perspective of those of us who try to spend a portion
of our time figuring out significant trends in the global
economy and their implications for the geopolitics and investment
banking of our time. B-Schools,
which are of extraordinary significance in organizing data
and coordinating insight in the modern world are at the
forefront of generating the agenda and the assumptions which
people use in the next generation of decision-making.
We have seen the global issues taking certain kinds of form
in the last year, investment banking reports focusing on
commodity price, cross-border investing in resource sectors,
the decentralization of innovation to Korea, China and India
in new information and telecommunications technologies,
the changing pattern of consumer demand as new consumers
come into the global market in China, India and Africa.
There are some other complex forces underlying the global
economy right now, against a backdrop of the debates on
globalization which may finally be taking a practical form
and being removed from the ideological language of free
trade and the simplistic language of those who oppose any
contamination of localized decision-making.
This is the next round
of international business activity, where investment bankers
have to go beyond the obvious issues of the rise of India
and China and look
at the new patterns out there create some real chances for
innovations in the new global economy. This
is a very different economic structure.
Oil, microfinance and the rise of new consumers in the global
economy and the commercialization of the knowledge of the
South are all themes which will come to dominate global
investment activity in the next year.
This should not be read to believe that the rise of China
and India has so
transformed the world’s capital markets that dominant players
like Intel, Alcatel, Goldman Sachs and GE will not have
transformative roles in the shaping of new patterns of growth.
It should simply mean that there are new players, new strategies
and new directions.
For global investors, this means following the approach
that has led a number of investors to focus on areas of
extraordinary growth potential: a democratic Iran
, positioned between Dubai and Singapore; an innovative
South Korea commercializing creative industries, a
series of microfinance-backed initiatives enhancing crop
production in African countries with a high performance
by the standards of Transparency International,
well-positioned activities with access to the English-speaking
world of global e-commerce such as the Tamil e-commerce
initiative, petroleum investments that meet the standards
of social responsibility and transparency that may be allowed
to develop in west Africa. For global
corporations, this means the admission of a world of significant
new activities, where remittances become more important
than foreign aid in determining patterns of growth and consumption,
where the habit of multi-citizenship becomes a new pattern
and global nomads become global messengers.
These are all disruptive innovations in our way of thinking,
all exciting, and all elements of a very different paradigm
in politics, investment banking and entrepreneurially-led
approaches to sustainable prosperity. For
management educators, this means the development of new
curriculums and intellectual property for the analysis of
these trends. (**)
Understanding the shape and density of the new paradigm
is of particular importance to international business students
(and I would argue that all business is international in
the decades ahead). It is not a
world where the U.S.
is able to be the source of innovation in all areas.
Medical innovations may come from China,
agricultural innovations from Africa, the management of
the world of e-commerce from India.
New trading patterns will link Dubai and Singapore.
New consumption patterns will be innovated in Lima and Medellin
as well as in Copenhagen and Seattle.
Investors will have to follow the new patterns of building
sustainable growth in companies.. Company strategies
will have to go beyond disruptions to creating and managing
disruptions themselves, accessing opportunities which didn’t
exist a year ago.
(*)
The innovative work in business strategies currently
being done by trend-setters like Costas Markides
on disruptive strategic innovation, Clayton Christensen
(www.claytonchristensen.com) on disruptive innovation and Richard D’Aveni on hypercompetition
(www.tuck.dartmouth.edu/faculty/publications/voices_rad.html) all are products of a new line of thought about corporate
strategies. Companies are learning to
deal with disruptions as opportunities and a chance to redefine
competitive advantage. The development of new
thinking on globalization and the changing role of “emerging”
market economies as a strategic disruption remains one of
the most interesting topics for business strategy discussion.
(**) If interested, look at the
Global Business School Network meeting in Lagos for African business school deans
http://www.ifc.org/ifcext/bsn.nsf/Content/Second_Workshop_Lagos
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