Innovations In Emerging Markets

Talk about Innovation:from Brazil, the Waterless Car Wash

The emerging markets 'innovation du jour' post comes from our friends at the World Resources Institute. To be frank, the post in question on their nextbillion.net blog is a year old. However, it is still attracting requests for franchise information and entrepreneurs from as diverse a range of places as Mozambique, India, and California.

The post may be dated but it says a lot about the lead taken by some emerging markets as sources of innovation and incubators of environmentally-friendly enterprises. Just as importantly for our purposes, it says even more about the global market for innovation and clean technologies. It's alive and well and taking full advantage of the consumer-led blogosphere's promise.

Counterpoint on Microfinancing and its Impact on Poverty

Our blog posting on the state of global microlending last week carried cautionary statements by WBG representatives about the industry's need to maintain the delicate balance between profit-making and development.

At about the same time, practically across the street at our World Resources Institute friends' nextbillion.net blog, a heated discussion on this same topic broke out. We're linking to the relevant posting here. The string of comments was touched off, perhaps predictably, by a Stanford Social Innovation Review news article provocatively titled, "Microfinance Misses its Mark."

Mexico Microlender's IPO Shatters Records and Myths

Mexico's Compartamos held a $407 million initial public offering in April 2007-- the first time a microlender received so much attention from mainstream, profit-maximizing institutional investors.

Compartamos is one of Latin America’s largest microfinance institutions with more than 600,000 borrowers who receive loans as low as $100, and is en route to even bigger growth after going public with help from Citigroup’s Mexican affiliate. Reaching that point took much investment and technical assistance from international financial and development institutions, including IFC and the specialized global microfinance organization, Consultative Group to Assist the Poor (CGAP).

Calling access to financial services one of the most powerful boosters of development, CGAP Director Elizabeth Littlefield said:

“Microfinance used to be seen as charming methodology that worked—an endearing niche of the development world with enterprising women hard at work with sewing machines or fruit stands. But ministers of finance around the world are starting to understand that access to finance for the poor is much more than that,” she said. “It’s about building efficient and equitable financial systems that serve the majority of the population—the electorate—in their countries.”

Littlefield also warned that “the two worlds of profit and development are now starting to collide in microfinance, creating both conflict and opportunities” and said there would be “a very strong ongoing role for both IFC and CGAP in navigating these conflicts."

IFC is one of the longest-standing, most active investors and advisors in commercial microfinance, with a global portfolio that now exceeds $500 million. As of end 2006, IFC's microfinance activities had reached roughly 3.5 million micro-entrepreneurs in emerging markets.

Creating the Conditions for Innovation by Enterprises

The financing of small and medium enterprises (SMEs) and equity markets can play a critical role in fostering economic productivity by financing innovation. That's the central premise of a new World Bank Group paper, which discusses the components of an SME-friendly market architecture and links to policies that foster a new class of investable equities.

More than 24 countries in emerging markets operate separate boards and exchanges aimed at SMEs, the paper says. But only a few SME exchanges function properly, providing coveted fresh capital and liquidity. The key steps to building an efficient exchange to provide risk capital for SMEs are addressed in detail.

Transferring Business Skills to Africa

The transfer of technology to emerging markets is seldom in question today. The transfer of business skills is another matter. In Africa, business knowledge is at least as vital to help guide country economies, set up regulatory frameworks and create thriving businesses.

"Africa is in desperate need of qualified and talented management to help its economies, not only running companies but helping entrepreneurs and ensuring more effective corporate and legislative governance policy,"

a recent CNN Int'l article says.

The article goes on to say that qualified African managers can also help put together vital inward investment with policymakers, multinationals, and charities.

Efforts to raise standards has been garnering international momentum in the past three years with the creation of a network of global businesses and universities, dedicated to bringing management knowledge to Africa. An April conference in France, hosted by network participant Insead, on "Nurturing Business Education in Africa" is part of the efforts.

For-Benefit Corporations -- Hot New Business Model or Fad?

The most downloaded New York Times business article recently was "Make Money, Save the World". Yet another sign of one of the hottest trends in business today: corporations doing well while doing good. It's not only here to stay; it's now a full-fledged business model.

Altrushare Securities, the article says, is a firm majority-owned by two charities. So the question is: "Is it a for-profit business or a nonprofit fund-raising machine?" The answer: both. To coin the expression coined in the article: it's a for-benefit corporation.

The term may be brand new, but the concept has been around for a while. Since its creation over half a century ago, IFC has been dedicated to the notion that a corporation can do good in emerging markets through investments in private enterprise. By helping companies of all sizes access opportunities in emerging markets, IFC is furthering development impact on the ground in those countries.

Just one of the earliest examples of how companies are "making money, saving the world".

For more on IFC's efforts to create opportunities in emerging markets, click here

How A Private Equity Fund in China Helps Development

China's Mengniu Group is today the country's top seller of milk and a leading dairy product manufacturer. It got a major boost from the CDH China Fund -- a private equity fund in which IFC invested in 2002. Mengniu now serves as an incubator for small business development.

CDH China played an active role in helping the Mengniu Group to restructure its ownership and shareholding, improve its corporate governance, and expand its operations. Through its supply chain program, Mengniu helps its small suppliers access finance as well as training in animal husbandry to optimize their production.

As part of its focus on quality and innovation in the dairy industry, Mengniu has adopted and implemented international best practices and standards encompassing food safety and quality, worker health and safety standards, and environmental management.

How Equity Funds Impact Development
Over the past 20 years, and as one of the largest investors in this sector with $1.7 billion in investments in more than 100 private equity funds in emerging markets, IFC’s experience has shown that there is a strong relationship between fund performance and development impact.

The quality of the fund manager is the main driver of performance. So IFC’s investment strategy is to seek managers who add value to the companies in which they invest, rather than just supply capital.

For more information, see IFC Private Equity

The Two Cs of Success in South-South Investing

Culture and capital -- that's how emerging market companies are beating rich country rivals in developing countries. The founder and chairman of India’s Satyam Computer Services, B. Ramalinga Raju, noted at the World Economic Forum in February,that culture can be as important to multinational success as capital. Satyam is developing a more international workforce by recruiting entry-level professionals from 20 different countries to live and work in India alongside the company’s domestic managers.

On the same panel, Mazen S. Darwazeh, Chairman of Jordan-based Hikma Pharmaceuticals, also stressed the importance of building nationally and culturally diverse management teams in the earliest stages of a company’s expansion.

While emerging market firms can learn from employees from other countries, they also have important advantages developed from operating in their home markets. According to the UN Conference on Trade and Development, a key advantage of developing country investors over their developed country rivals is their greater familiarity with the economic conditions of host developing countries.

Operating in emerging markets, firms based in developing countries are more familiar with challenging investment climates and may be better able to tailor products and services to consumers in developing nations. Cross-border investments by these firms typically reach poorer and more remote developing countries than FDI from firms based in developed countries.

Emerging Markets: Home to 60 of Fortune 500 Corporations

In his newly published book, The Emerging Markets Century, Antoine Van Agtmael says that, by 2030, emerging market companies will overtake industrialized country firms. Among the book's many strengths, says a New York Times review is his discussion of the current boom in south-south investments, and his selection of the 25 top-performing emerging market companies today.

This blog post is not an attempt to plug his book -- the NYT took care of that. This is to claim some "guilt by association". While working at IFC as an investment officer in the late 1970s, Antoine van Agtmael coined the term “emerging markets” as a way of encouraging equity investors to think more seriously about the developing nations.

For more on how the term "emerging markets" was born, click here.

Know a Few Capitalists? Africa Needs Them Now

That's essentially the message contained in a recent New York Times column by Tom Friedman entitled "Patient Capital for an Africa that Can't Wait". The author of the "World Is Flat", as always, brilliantly articulates the business ethos of the region.

Africa, he says, is in a middle place in the global economy,

"a wild, unregulated, informal, individual brand of capitalism, which we need to channel into formal companies that can grow and scale up, even with corrupt governance." ... "People grow out of poverty when they create small businesses that employ their neighbors. Nothing else lasts."

From IFC, one can still literally hear the applause: "way to go, Tom"; "right on, man"; "yesss, tell'em, it's about jobs and about scaling up small businesses." [Okay, there were also a couple of grumpy comments from our private sector development purists, as in: "who's the "we" in the "we need to channel" part of the sentence, Tom?," and thanks for specifying that capitalists can help start and run legal companies, Tom.]

Overall though, that is the sum of IFC experience and activities in Africa: investing in the expansion of companies such as the one mentioned in Friedman's column, Kenya's Advanced Bio-Extracts company. Like many small companies in Africa, ABE failed to get financial backing and credit from banks because of a lack of track record and collateral.

IFC was among those who stepped in with an investment in ABE, then helped bring in other financial investors like the Acumen Fund to partner in the project. Unlike ABE, whose CEO Patrick Henfrey worked at IFC for 11 years, many companies in Africa lack the financial know-how. They seek IFC as much for training and advice as they do for credit and support.

Backing Africa's small companies pays dividends in terms of development impact too. As Friedman mentions, ABE employs over 150 people in one of their factories and has contracted with several thousand farmers to grow the anti-malarial plant artemisia in Kenya and the neighboring countries of Tanzania and Uganda.

In Africa, both the investment and development potential is enormous.....and as Friedman says, what it needs now is many good capitalists.