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Pieces on contemporary investment strategies and situations in the Global Economy.
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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