Innovations In Emerging Markets

Chinese Banks -- Still Not A Run-of-The-Mill Investment Decision

In 2005 foreign banks took stakes worth $18 billion in China's biggest banks, a McKinsey Quarterly article notes. Certainly an indication of international investor confidence in the improvements made by Chinese banks over the last few years in the area of performance and governance.

Despite the progress, the authors caution that Chinese banks still lack crucial commercial skills. Those are particularly visible in the area of loans pricing, leading to a tendency to lend too much money to underproductive state-owned enterprises. Just as importantly, few banks have the systems to guard against accruing bad loans.

The impact of those shortcomings on economic development warrants attention, since they suggest the likelihood of a skewed investment picture. The authors say "Chinese companies get loans at abnormally low rates, which encourages overcapacity and inefficient investments in many sectors."

Emerging Market Multinationals Changing Rules of the Game

The buzz continues on emerging multinationals. BusinessWeek’s most recent cover story says home-grown companies from countries such as Brazil, Russia, India, Egypt, and South Africa are successfully making inroads in international trade in every imaginable sector, from aircraft to farm equipment to refrigerators to telecoms. Companies such as Brazilian aircraft manufacturer Embraer – an IFC portfolio company –- are changing the rules of the game. How were firms from developing countries able to develop such an edge?

To survive in their own unprotected economies they had to beat not only local competition but the Western multinationals. And that meant making profits at prices that Europe and the U.S. would find unthinkable. And when the best of these innovative companies bought cheap assets from their retreating Western competition, they went after opportunities throughout the developing world. World Bank Group estimates say south-south corporate investment more than tripled to $47 billion in the period 1995-2003. Currently it is probably closer to $60 billion.

China’s Private Firms Drive Investment Expansion

As China's economy leaps forward, many firms are churning out big profits that they are using to power up and expand their businesses, says a Financial Times article [closed access]. These even include some of the state-owned semi-monopolies such as China Mobile. The force of the country's profit-driven investment boom is making it harder for the central government to slow down the economy.

Surprisingly, it isn't householders who are China's biggest savers -- it's the country's corporate sector. Both private and public firms are the driving force behind China's investment expansion.

Some economists -- both foreign and Chinese -- say a more flexible renminbi is the answer. If the currency were more expensive, they say, it would trim the trade surplus or slow growth. But China's establishment cannot agree on what to do with the currency.

World's Financial Institutions Take Responsible Investing to Next Level

About forty international banks, controlling over 80 percent of all project financing around the world, have agreed to further strengthen a set of environmental and social standards known as the Equator Principles. In practice, that's taking responsible investing to a major new level.

How major? The agreement means most large global projects over $10 million will now be assessed for their impact on the environment or local population before receiving financing. As one Citigroup official told Reuters: "The Principles created a de facto global standard for the project finance business." A World Resources Institute official applauded the move, saying this showed global lenders are "creating better mechanisms for local communities to have their say before projects go forward on their land."

The agreement last week has been in the making for three years. In 2003, 10 financial institutions announced they would adopt IFC environmental and social guidelines for project financing. Since then, IFC has developed new guidelines, and the ranks of adherents to the Equator Principles have grown.

Nearly Half of All Investors in Africa from Emerging Markets

A recent survey of over 1200 companies operating in Africa's nonresources sectors shows a growing number of emerging markets firms are investing in Africa. In fact, investors in 15 countries in Africa are now almost equally from developed countries (54 percent) and emerging markets (46 percent), an article in South Africa's Business Day says.

South Africa and India top the list of emerging market investors in Africa, while France and the U.K. lead the developed countries list. And there are marked differences in investment styles:

"The survey supports the view that investors from developing countries are less risk-averse — or more willing to adapt to hostile conditions — than those from developed countries...The survey shows dramatically that investors from the south are much less likely to see negatives in the operating environment, such as problems with the local market or political stability."

Which nonresources sectors are attracting investments? The survey says South African investments are going mainly to services.

The World's Leader in Sustainable Banking Recognized

HSBC, the world’s third largest financial services group, is the global leader in merging social, environmental, and business objectives. HSBC is the first-ever recipient of the Financial Times Sustainable Banking Awards. The global award is designed to recognize banks that have shown leadership and innovation in integrating social, environmental, and corporate governance objectives into their operations.

Emerging markets banks distinguished themselves in this field as well. Brazil's Banco ABN Amro Real walked away with the "Emerging Markets Sustainable Bank of the Year" distinction, while several others received commendations.

The Financial Times and IFC assembled a panel of global experts to select winner of the FT Sustainable Banking Awards.

China's Entrepreneurs Set to Go from Imitators to Innovators

China has made innovation a national priority, a recent McKinsey Quarterly survey says. There are early signs that the shift at the level of Chinese firms is beginning to happen, although there is a long way to go before they start making the list of most creative global companies, the survey adds.

The telecom equipment maker Huawei Technologies is the lone Chinese firm that made the World Intellectual Property Organization's list of top 50 innovative companies this year. Chinese inventors and companies filed 2,452 international patent applications last year—a 44 percent increase from 2004.

Meanwhile, the government has plans to increase expenditures on research and development from the current 1.2 percent of GDP to 2.5 percent by 2020. Armed with tax incentives and other strategies to foster increased creativity by local firms, China may well be in the midst of overseeing the next major shift in Chinese domestic enterprises, from mere imitators to innovators.      

Private Companies in China Alive and Well, and Suing

A July 6 South China Morning Post article reports that China's Xugong Construction Machinery is considering suing rival Sany Corp for disrupting its buyout deal with the U.S. Carlyle Group. An IFC colleague in Beijing sent us the clipping (article still not posted), noting the key aspects of the news report.

On the one hand, the threat of legal action indicates a thriving Chinese private sector. Even more salient to our colleague is the reference made by a Xugong official regarding corporate governance issues. IFC keeps a close watch on the development of corporate governance standards in private firms throughout the emerging markets, offering advisory services where needed. Talk of corporate governance is a vital step forward in the evolution of China's firms. Action on corporate governance is the next step in tehir ability to compete globally.

Malaria Losing Fight against Business in Africa

International aluminum producer BHP Billiton joined in an exceptional partnership with the governments of three African countries and with other businesses to take on malaria across the region. Six years later, the New York Times reports, malaria is losing.

Billiton's initiative began in its Mozal smelter in Mozambique, where one in three of their employees -- almost 6,600 cases in two years-- were affected by the disease. Billiton's example is being hailed by the UN as a model of private sector and government partnership. The key to the success of this model, observers say, is a partnership which mobilizes efforts regionally while matching resources to the scope of the disease.

Mozal represents a capital investment of $1.3 billion, making it one of Africa's largest enterprises. To be effective on a wide scale, the partnership model must involve companies that have a fraction of Mozal's financial and managerial resources. IFC is doing exactly that in the fight against AIDS.

Over the past few years, IFC has created partnerships with African companies under the IFC Against AIDS program. One of them is Mozal itself, for which IFC provided much of the financing. Other companies involved in the program are much smaller. The aim is to help smaller companies replicate Mozal's model and be as successful against equally devastating diseases.

Watchwords for Emerging Markets Investing Remains "Cautious Exuberance"

Investors in emerging markets have had a rough ride over the past few weeks. One Financial Times article summarized just how rough: "The South African rand has tumbled, Hungarian bonds have been sold, and the Turkish stock market has crashed 41 percent in dollar terms in seven weeks."

Amidst the general stomach-churning among investors interested in emerging markets, a Wharton Alumni forum in Instanbul on the prospects of emerging markets provides useful perspective. One Wharton alumni of note, former IFC Acting Executive VP Assaad Jabre, told the forum: "Emerging markets will be the winner of the globalization process. A few years ago, many people were saying that developing countries would be the victims. We know that won't be the case. China, India, Turkey, and others are success stories." Jabre says a major reason is the growth of the private sector in those countries.

The optimism of the Istanbul forum speakers is in synch with the "cautious exuberance" that World Bank Group and other emerging markets experts have expressed since the beginning of the year. Our earlier posts reflect the prevailing views: Fall in Emerging Markets Financial Vulnerabilities Not Temporary, and Speed Bumps on the Road to Emerging Markets, among others.