Innovations In Emerging Markets

Emerging Economies Coming Out Ahead

Emerging markets are performing better than they have in decades, reports the Economist. During the past five years, GDP per capita in developing countries has grown annually by an average of 5.6 percent – compared with only 1.9 percent in industrialized countries.

Higher commodity prices and U.S. consumer spending have fueled such rapid growth. New reforms and sounder economic policies have also made developing economies better able to withstand shock. In fact, they are running on average much smaller deficits than the developed world.

Although some risks remain – from banking crises to unrest – potential future growth remains huge, if reforms continue and if emerging nations are able to raise productivity by adopting innovations from wealthier nations.

Indian Firms Show Government Way to Global Markets

Indian corporates are far ahead of the government with regard to cross-border mergers and  acquisitions, and foreign direct investments. India is just now getting in step with its domestic companies, considering comprehensive regulation in support of outward foreign direct investment: specific measures to support cross-border direct investment by Indian firms are being considered, including possible government guarantees to mitigate political risks.

In a similar vein, South Africa has made a key change to its foreign exchange regulations, which is expected to lead to more cross-border investment, especially in the rest of Africa.

Better late than never, though: leverage provided Indian companies through economic liberalization strengthens their chances to compete globally against looming competition from Chinese companies. The latter's outward investments are set to rise sharply, partly in response to the government's "Go Global" policy.

The Changing Course of Socially Responsible Investing

Socially responsible investing may now be taking a new tack: instead of steering money away from controversial sectors such as breweries, weapons manufacturers, and casinos, investors are beginning to have a higher tolerance for “sin,” says the Wall Street Journal. That’s because returns on SRI are flagging: high-growth funds have returned approximately 1 percent in the past year, but large-growth SRI funds returned only 0.21 percent for the 12 months through July.

Some funds, such as Pax, will ask its shareholders to vote on whether to eliminate a zero-tolerance policy against gambling and alcohol, while considering whether to take environmental issues into account. Other SRI funds are also taking a similar path but adding different critera, such as employee treatment and diversity.

Indian Corporates Ahead of Chinese in Cross-Border Investments

Driven by growing self-confidence, the corporate sector in India has left behind it the days of the "license Raj." One need only look at the range and frequency of cross-border merger and acquisitions investments recently announced by Indian companies, for evidence. Projections by industry observers confirm the trend.

By comparison, given the size and dynamism of China's economy, cross-border M&A by Chinese firms is modest, relative to Indian or even South African firms. More on this from a BCG report quoted in India Daily.

Top Emerging Market Execs Discuss Strategy at Global Gathering

Where are southern companies investing next? What are the drivers for their investment moves in southern markets? What do they think of the business risks associated with expansion into those markets? All riveting questions to those of us watching the ascension of southern multinationals to global competitive form.

On September 17, top executives of key southern multinationals will address those questions during the "Emerging Champions: South-South Investing" seminar held at the IMF/WB Annual Meetings in Singapore. The panelists include CEOs and top executives of Russia's INTERROS, Hong Kong's Hutchison Telecom, Spain's Santander Bank, India's Tata Sons, and Singapore's DBS Group.

Their remarks and discussion will be covered by the IFC blog more extensively next week. Future IFC blog moderator on south-south investments, Reyaz Ahmad, is the seminar organizer and is currently in Singapore. He will provide us with highlights of the discussion in real time.

Multinationals and Human Rights: Getting It Right

Activists aren’t the only ones concerned with human rights – it’s a big priority for multinationals, too, reports the Financial Times. A recent U.N. survey of the Fortune 500 found that 91 percent of firms that responded said they had management plans in place regarding human rights and the consequences of company operations. But only 46 percent of firms stated that they had experienced “a significant human rights issue.”

As a sector, the extractive industries had the most significant difficulties: two-third said they had experienced human rights problems.

An Indian CEO Explains How Good Governance Leads to Growth

Good corporate governance is good business, declares the CEO of one leading emerging market company in a Wall Street Journal op-ed.  Neeraj Bhargava, head of India's WNS Global Services -- a business process outsourcing firm -- believes that by adopting international best practices he is ensuring a healthy bottom line for his company.

There are other benefits as well. By adopting such standards, firms take their place in the global corporate community, becoming better partners to do business with. International best practices also make companies more attractive to employees.

The cost of good governance does not come cheaply. But says Bhargava, the benefits of adopting high standards outweigh the drawbacks as companies move toward greater efficiency, stability, and long-term growth.

Emerging Markets Status Report: How Are Banking Systems Performing?

Since the 1990s and the banking crises in emerging markets, selected countries have made a lot of improvements, thanks to changes in banking structures, performance, and risk management capacity. That is the overall conclusion of a recent Bank for International Settlements article, entitled: "The Banking System in Emerging Economies: How Much Progress Has Been Made?".

The paper provides an all-too-rare comparative glimpse into the health of banking systems across emerging economies. Because it relies on a series of contributions by senior central bank officials, it lacks some perspective and falls short of providing country data specifics. On the other hand, it takes a thematic approach, drawing helpful general conclusions on five questions relevant to observers of the global financial markets architecture.

From the standpoint of an international financial institution such as IFC, the most interesting question is the one related to recent trends in the availability of bank credit in emerging economies. The paper argues that the share of bank credit to the business sector has in fact declined over the past decade. Why? Because, the paper says, lagging investment spending has curbed corporate loan demand and financing in bond and equity markets has become more available.

There are similarly insightful takes on several other topics, including the pace of structural change, the evolution and management of risks, the prevention of systemic banking crises and the impact of changes in financial intermediation.

Cleantech: Not a Dirty Word for Venture Capitalists Anymore

This blog has covered the booming clean technology industry in emerging markets before. Now comes news that venture capitalists in the U.S. are catching on. The alternative energy industry is "in" and not just because it's green, an International Herald Tribune article notes.

In emerging markets, the impetus for the growth in investments in alternative energy sources is fueled largely by high fuel costs, as we noted in our earlier blog entry "Clean Energy Firms Have Moment in the Sun."

Not so in Silicon Valley, where innovations in finance are finally catching up with cutting-edge technology. The IHT says:

"On its face, interest by investors appears to be driven by higher oil and energy prices and the drain they have created on the economy. But there is also a more immediate allure, as investors have become receptive to alternative energy companies."

One count puts the number of funds focused on U.S. clean tech companies at 100, up nearly 40 percent from a year ago. Whatever the motivation behind the surge of interest, the end clearly justifies the means.