Are New Global Investment Intermediaries required to Overcome Current Economic Crisis

By : Amit Bhushan

The world is trying to come to grip with a Europe in mild recession, even as the US and rest of the world is moving into a phase of moderate growth. While the growth in US is coming from Manufacturing propping up most other sectors, the China is growing services and shedding some of its manufacturing. The rest of the world is lapping up manufacturing space being vacated by China while developing Services alongside. This seems largely to be the new growth paradigm. This has already arrested the falling commodities and is a cause for food inflation in emerging markets. Steadily, as the Agriculture develops root in Africa, there could be a stronger clamour against subsidies in the West and rebalancing of the sector across globe. This may be a simplification but seems to be a broad summation of the emerging trends. This battle is likely to result in a war to attract investments in the medium term. This war seems to be developing steadily however most of the Emerging markets are still in a state of disarray which almost equals or is worse than the state of affairs in Europe. While Europe is steadily sinking into disarray, the emerging markets almost never had a trustworthy investment protection environment/institutional structure and are new to the game. Also, the information about the opportunities offered by them is not known amongst the investors in regions such as Middle East, China, Japan etc. who have the capability to tilt the scales and provide decisive advantages to nations. The investors as well as institutional intermediaries for investment in US and Europe which control the global markets are yet to adjust to the new realties. Most such institutions are biased in favour of their domestic markets and towards established institutions & corporates, stakes in which have been repriced at lower values. They see this as lower risk even as they are steadily more aware that these models are not really growing production/productivity in real terms. Giving financial returns on sustainable basis is thus unlikely especially in environment that is more circumspect. While there would be some merits in sticking with the established corporate with time tested policies, technical & managerial competencies, governance structure and global scale operations that allow opportunities to be harnessed across the globe, ignoring nascent business structures in the emerging markets could be a fallacy one should avoid. There seems to be a case in investing in projects directly in emerging markets or even betting on some of the home grown technologies in domestic markets. This is because culturally, technologically and from the point of view of assimilation of management practices, the emerging markets would retain some of their domestic flavours. Some of these virtues may be strong enough to withstand the test of times and pass onto the new paradigm as one of the best practices. Doing away with them wholesale or ignoring these could be a potential opportunity cost to investors. The Chinese companies have shown respect for such factors. Though the western media maligned the Chinese businesses as those with low ethics, it is known to seasoned analysts that the west has ceded ground to China in many of the emerging markets and the lost ground cannot be recouped

immediately. Now, with many ASEAN and other Emerging market players joining Chinese in investing in one another, the battle to capture right investment opportunity is also hot-ting up. What is increasingly clearer that the Emerging countries and governments that need to lay down well defined policy roadmaps and a fair and equitable regulatory structure for sectors offered to foreign investors include taxation, accounting etc. This policy and regulatory structure must be a result of an open and wide spread debate and guarantee stability and fairness to all stakeholders and a clear mechanism through which changes in policies can be made. While deal fixers in emerging markets still rule the roost as they manage to show instant results to policy makers as well as to investors, the turmoil and change in governance structure which has become hallmark of democracies in current troubled economic environment is simply too high a risk for foreign investors. This is then followed by local government issues that carry forward and implement the policies on ground. The foreign investors would want to see that policies are being implemented in a fair and equitable manner on ground for all players in the sector giving a level playing field. This is subsequently followed by Corporate governance issues of the entity itself which should treat all investors fairly and is not a cause of allowing undue favours or profit leakages for management or select investors/vendors/ dealers. There should be mechanism for proper and timely communications for guidance and markets/regulations to allow investors to take actions that they deem appropriate. Foreign investors are now broadly aware that a utopia cannot be achieved and thus are ready to lap opportunities that are largely fair with clear roadmap that hold promise for significant gains; however this comes only after short listing of countries and industry sectors. They mostly want to shun the regulatory surprises that crop up in high frequency in emerging markets including political/quasipolitical structures that fleece monies which was supposed to be investors profit at the time of committing investments. With this in mind an appropriate investment vehicle is created to take an exposure with the right institution that could take the plans forward in an effective manner. While the guidance of local government officials and ministers is welcome, however it is not a sole criterion for decision making these days. Much also depends on the investment strategy of the foreign investors. The high risk foreign investors may decide to invest is clutch of local companies with locally innovated technology and products which have shown promise by growing the consumer base in the face of foreign competition. They may look to benefit from the high domestic growth in the domestic market as well as potential to carve a niche for such products and technology which may be possible especially if the same is a cost effective substitute for globally manufactured product and services. The bet here is to grow the company and take it public with chance to make substantial gains at the time of exit. This segment is gaining grounds and is betting on next round of equity explosion in coming 5-8 years. They also seek to benefit from creation of similar structure across a large number of emerging markets by the way of transfer of technology and management competencies in order to sustain their global investment model. The medium risk investors are more focused with selecting the right projects which can be have significant national/regional ramifications and offer sustainable benefits over the medium to long term.

The scrutiny for products, technology and management competencies are of crucial importance and often joint ventures or globally competent developers are sought to nurture and mitigate risks in such projects. The stakes are high for all parties involved and government is engaged actively at all levels. The governments commitment to developing projects and sector is at test and increasingly as the scope of deal fixers is shrinking, so the reputation of the politicians themselves is at stakes. Creation of transparent structures to deal with issues that emerge, limitation of bureaucratic hurdles/single window clearance etc. is being demanded including management of activist activities including limitation of legal hurdles, costs and liabilities. The low risk foreign investors prefer to stick to globally tried and proven products, technology and management structures. The investment from such sources come tied with a lot of strings and conditionality but it sets the trend for sector, country and for the policy making within the government. These investors are sought as an anchor for the investment climate of the country and industry sector. These institutions have become significant influencers however some of them are being tested by the local consumers and communities where they have failed to keep up to the expectations. Thus global investors now know that consumers and communities cannot be suppressed any longer as they have potential to change governance structure to negotiate a more favourable deal for them. These hitherto unorganized lot is increasingly more vocal, better educated and informed than ever before, and has potential to bring corporate on their knees. So instead of manipulations, it is increasingly a right balance that is being sought for sustainable return on investments. It is incumbent on the Government to evolve the laws and policies along with a governance structure that regulates industry sectors in a fair and equitable structure. An independent Judiciary that can deliver timely and effective jurisprudence to all as per defined laws is a cherished asset in the current environment. However, the businesses and politicians in most emerging markets used to deal with fixers for instant delivery of benefits are yet to absorb this import of the changed economic scenario. Also, the investors in most regions would take time in identifying from good fixers and bad fixers as they gain experience overtime. It is important to note that the activity is still a work in progress however rewards will go to countries and industry sector that acknowledge the same and engage with all stakeholders in policy making in open and transparent manner with public reporting & updates of progress at frequent intervals.