TURKMENISTAN GAS REVENUES AND EAST AFRICAN BOTANICALS: SOME CURRENT TRENDS IN VALUE-CREATION IN THE GLOBAL
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.
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:
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.
THE NEW GLOBAL ECONOMY: CASE STUDY #1
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 NEW GLOBAL ECONOMY: Case Study #2
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.
THE NEW GLOBAL ECONOMY: Case Study #3
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.
THE NEW GLOBAL ECONOMY: Case Study #4
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.
CONCLUSION: REMOVING INEFFICIENCIES FROM GLOBAL CAPITAL MARKETS
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.