A bigger world A special report on globalisation September 20th 2008

GGlobalisation.inddlobalisation.indd 1 55/9/08/9/08 116:33:076:33:07 The Economist September 20th 2008 A special report on globalisation 1

A bigger world Also in this section The new champions Emerging markets are producing examples of capitalism at its best. Page 3

Ins and outs Acronyms BRIC out all over. Page 5

The empire strikes back Why rich•world multinationals think they can stay ahead of the newcomers. Page 6

Oil, politics and corruption Bad capitalism carries its own risks. Page 9

The rise of state capitalism Coming to grips with sovereign•wealth funds. Page 11 Globalisation is entering a new phase, with emerging•market Cities in the sand companies now competing furiously against rich•country ones. A new sort of investment partnership. Matthew Bishop asks what that will mean for capitalism Page 12 LOBALISATION used to mean, by and ing cap in hand to the sovereign•wealth Glarge, that business expanded from funds (state•owned investment funds) of Opportunity knocks developed to emerging economies. Now it various Arab kingdoms and the Chinese As long as the protectionists don’t spoil it. ‡ows in both directions, and increasingly government. Page 13 also from one developing economy to an• One example of this seismic shift in glo• other. Business these days is all about bal business is Lenovo, a Chinese comput• Œcompeting with everyone from every• er•maker. It became a global brand in 2005, where for everything, write the authors when it paid around $1.75 billion for the of ŒGlobality, a new book on this latest personal•computer business of one of phase of globalisation by the Boston Con• America’s best•known companies, IBM‹ sulting Group (BCG). including the ThinkPad laptop range be• One sign of the times is the growing loved of many businessmen. Lenovo had number of companies from emerging mar• the right to use the IBM brand for †ve years, kets that appear in the Fortune 500 rank• but dropped it two years ahead of sched• ings of the world’s biggest †rms. It now ule, such was its con†dence in its own stands at 62, mostly from the so•called brand. It has only just squeezed into 499th BRIC economies of Brazil, Russia, India place in the Fortune 500, with worldwide Acknowledgments and China, up from 31 in 2003 (see chart 1, revenues of $16.8 billion last year. But Œthis In addition to those cited in this report, the author is particularly grateful for the insights, many of them o the next page), and is set to rise rapidly. On cur• is just the start. We have big plans to grow, record, of Hal Sirkin, Nandan Nilekani, Alvaro Rodriguez rent trends, emerging•market companies says Yang Yuanqing, Lenovo’s chairman. Arragui, Bernard Charles, Joshua Ramo, Michelle Guthrie, will account for one•third of the Fortune One reason why his company could af• Arjun Divecha, Len Blavatnik, Viktor Vekselberg, Malvinder Singh, Bill Ford, Michael Green, Lord John list within ten years, predicts Mark Spel• ford to buy a piece of Big Blue was its lead• Browne, John Studzinski, Bill Rhodes, Diana Farrell, man, head of a global think•tank run by ing position in a domestic market buoyed Mikhail Fridman, Graham Mackey, Thor Bjorgolfsson, Ram Accenture, a consultancy. by GDP growth rates that dwarf those in Charan, Nabil Habayeb, Diana Glassman, David Rubenstein, Eli Jacobs, Dambisa Moyo, Alastair Newton There has been a sharp increase in the developed countries. These are lifting the and Michael Patsalos Fox. number of emerging•market companies incomes of millions of people to a level acquiring established rich•world business• where they start to splash out on every• A list of sources is at es and brands (see chart 2, next page), stark• thing from new homes to cars to comput• www.economist.com/specialreports ly demonstrating that Œglobalisation is no ers. ŒIt took 25 years for the PC to get to the longer just another word for ŒAmerican• †rst billion consumers; the next billion An audio interview with the author is at isation. Within the past year, Budweiser, should take seven years, says Bill Amelio, www.economist.com/audiovideo America’s favourite beer, has been bought Lenovo’s chief executive. by a Belgian•Brazilian conglomerate. And The sheer size of the consumer markets More articles about globalisation are at several of America’s leading †nancial in• now opening up in emerging economies, www.economist.com/globalisation stitutions avoided bankruptcy only by go• especially in India and China, and their 1 2 A special report on globalisation The Economist September 20th 2008

terparts. Emerging•market †rms with ex• Sixty-two, and counting 1 perience of serving these consumers think The new giants 3 Emerging-market companies in the Fortune they are better placed to devise such pro• Ten biggest Fortune Global 500 emerging-market Global 500 ducts than their developed•world compet• companies, 2008 70 itors. Lenovo, for example, is going after Global 500 Revenue BRIC the developing world’s rural markets with Company Country rank $bn 60 Non-BRIC a cheap, customised PC that enables farm• Sinopec China 16 159.3 50 ers to become networked. State Grid China 24 132.9 40 Some of these innovations have global China National China 25 129.8 30 potential. Lenovo’s Chinese R&D labs de• Petroleum 20 veloped a button that recovers a computer Pemex Mexico 42 104.0 system within 60 seconds of a crash, es• 10 Gazprom Russia 47 98.6 sential in countries with an unreliable Petrobras Brazil 63 87.7 0 power supply. Known as ŒExpress Repair, Lukoil Russia 90 67.2 2000 01 02 03 04 05 06 07 this is now being incorporated into its Source: Fortune computers everywhere. Petronas Malaysia 95 66.2 The same logic may apply to innova• Indian Oil India 116 57.4 2 rapid growth rates, will shift the balance of tions in business models that allow goods Industrial & China 133 51.5 Commercial business activity far more than the earlier and services to be delivered in fundamen• Bank of China rise of less populous economies such as Ja• tally di erent ways and at much lower pan and South Korea and their handful of cost. Lenovo, for example, has developed a Source: Fortune Œnew champions that seemed to threaten highly e ective formula for selling to Chi• the old order at the time. nese consumers that it has since taken to tional (headquarters far away from new This special report will argue that the India and America. markets) and cultural (old ways of think• age of Œglobality is creating huge opportu• Yet the rise of the new champions has ing)‹they have advantages too. The great• nities‹as well as threats‹for developed• brought a vigorous response from some of est of these may be a deep well of manage• world multinationals and new champions the old ones. IBM may have felt that it was rial experience, which emerging•market alike. The macroeconomic turbulence that no longer worth its while to compete in †rms often lack. Yet Lenovo has shown the world is now going through after al• PCs, but Lenovo is facing †erce competi• how to overcome this management de†cit most a decade of smooth growth will tion from American companies such as by hiring a group of seasoned internation• probably not alter the picture fundamen• Hewlett•Packard and Dell everywhere, in• al executives, including Mr Amelio, an tally, but it will complicate it. Despite all the cluding in China. Nor was IBM’s decision American who cut his managerial teeth at talk of Œdecoupling, emerging economies to sell its (low•margin) PC business due to a IBM and Dell. have recently been growing more slowly lack of commitment to emerging markets: But Lenovo went further than hiring in• because of their exposure to increasingly it now employs 73,000 people in India, ternational managers. ŒWe are proud of cautious American consumers. against 2,000 at the start of the decade, and our Chinese roots, says Mr Yang, but Œwe Moreover, high oil and food prices are hopes to increase the share of its global no longer want to be positioned as a Chi• creating in‡ationary pressures in many revenues coming from emerging markets nese company. We want to be a truly glo• emerging countries that had enjoyed years from 18% now to 30% within †ve years. bal company. So the †rm has no head• of stable, low prices along with extraordi• Although multinational companies in quarters; the meetings of its senior nary economic growth. The side•e ects of developed countries must grapple with managers rotate among its bases around rapid development, such as pollution and legacy costs of various kinds‹†nancial the world. Its development teams are water shortages, also need to be tackled. (pensions, health•care liabilities), organisa• made up of people in several centres ŒAfter a long period in which globalisation around the world, often working together has been all about labour productivity, the virtually. The †rm’s global marketing de• business challenge everywhere, and espe• Lean and hungry 2 partment is in Bangalore. cially in emerging markets, will increasing• Top five emerging-market M&As A huge e ort has been made to inte• ly be to raise resource productivity‹using Deal grate the di erent cultures within the †rm. fuel, raw materials and water more eˆ• value ŒIn all situations: assume good intentions; ciently, says Bob Hormats of Goldman Year Target Buyer $bn be intentional about understanding others Sachs, an investment bank. 2006 Inco Companhia Vale do 18.7 and being understood; respect cultural dif• Canada Rio Doce, Brazil ferences, reads one of many tip sheets is• A cheaper mousetrap 2006 Rinker Group Cemex SA de CV 16.7 sued by the †rm to promote Œe ective Assuming that the upbeat growth forecasts Australia Mexico teamwork across cultures. Mr Yang even for emerging markets remain broadly on 2008 Rio Tinto (12%) Alcoa; Aluminum 14.3 moved his family to live in North Carolina Britain Corp of China track and the developed economies get US; China to allow him to learn more about Ameri• back on their feet, what will be the main can culture and to improve his already re• 2006 Corus Group Tata Group 13.0 competitive battlegrounds of global busi• Britain India spectable command of English, the lan• ness? One is those new consumers, who 2007 GE Plastics Saudi Basic Industries 11.6 guage of global business. often demand products at far lower prices US Corp, Saudi Arabia In short, Lenovo is well on its way to be• and often in more basic forms or smaller coming a role model for a successful multi• sizes than their developed•country coun• Source: Dealogic national company in the age of globality: a 1 The Economist September 20th 2008 A special report on globalisation 3

2 good reason to be optimistic about the fu• the protectionist sentiment, turning even growing number of short•termist institu• ture of capitalism, even capitalism with a some usually enthusiastic global capital• tional investors in developed countries. Chinese face. Perhaps Lenovo and other ists into protectionists. Could the rise of But perhaps they will not. new champions will become the †rst of a the new champions re‡ect the advance of Again, Lenovo o ers an encouraging new breed of truly global companies, root• bad forms of capitalism at the expense of example. Even though its largest share• ed in neither rich nor developed countries good forms? holder is in e ect the government of Chi• but aiding wealth creation by making the In their 2007 book, ŒGood Capitalism, na, its acquisition of IBM’s PC business most of opportunities the world over. Bad Capitalism and the Economics of Pros• does not seem to have had any troubling perity and Growth, William Baumol, consequences. But maybe the Chinese Good and bad capitalism Robert Litan and Carl Schramm identify government was restrained by its co•inves• But is such optimism justi†ed? Indeed, four main models of capitalism around the tors, two of America’s leading private•equ• would Lenovo even have been allowed to world: entrepreneurial, big•†rm, oligarchic ity †rms. Besides, the new champions may buy IBM’s PC business today? Congress (dominated by a small group of individ• be typi†ed not by Lenovo but by, say, Gaz• nearly blocked the deal at the time because uals) and state•led. Most economies are a prom, through which the Russian state can it feared that valuable intellectual property mixture of at least two of these. The best make mischief abroad. As Mr Yang points might fall into the hands of the Chinese economies, say the authors, blend big•†rm out, of the 29 Chinese †rms in the Fortune government. Since then, China•bashing and entrepreneurial capitalism. The worst 500, Lenovo is the Œonly one that is truly has increased, there has been some Arab• combination may be of oligarchic and market•driven. Most of the rest enjoy mo• bashing too, deals have been blocked and state•led capitalism, both of which are nopoly power or operate in the natural•re• the rhetoric in Washington, DC, has be• prevalent in many emerging markets. sources industries, where there is far more come ever more protectionist. The worriers point out that, through scope for politics and corruption than in One fear is that American jobs will dis• corporate acquisitions and the invest• consumer electronics. appear overseas. This is despite plenty of ments of sovereign•wealth funds, the role At the very least, the growing role of academic evidence that open economies of the state (often an undemocratic one) in states that often lack democratic creden• generally do better than closed ones, that the global economy is rapidly expanding. tials creates a sense that the competition in America in particular many more and Given the lamentable history of state inter• from emerging•economy champions and generally better jobs have been created in vention in business, they say, this does not investors is unfair, and that rich•country recent years than have been destroyed, bode well. †rms may lose out to less well•run compet• and that the number of jobs lost to out• Such fears are not easily dismissed, if itors which enjoy subsidised capital, help sourcing is tiny compared with those only because what is happening is so new from political cronies or privileged access wiped out by technological innovation. that there is not much evidence either way. to resource supplies. Mr Yang explains that Œpeople thought we Sovereign•wealth funds insist that they are So there is a real risk that bad capitalism would manufacture all our products in interested only in getting a good return on will spread in the coming decades. Yet at China, but in fact we have opened new their money and will not meddle in poli• the same time this latest, multidirectional plants in Greensboro and also Poland, as tics. Perhaps they will turn out to be phase of globalisation o ers enormous we need to be close to our customers. sources of good corporate governance and potential for business to raise living stan• Lately a new fear has been adding to patient capital, in admirable contrast to the dards around the world. 7 The new champions

Emerging markets are producing examples of capitalism at its best

AFARICOM may not be a household tries (excluding mighty South Africa) listed account for 10% of global GDP at purchas• Sname in the rest of the world, but in Ken• around 500 companies with a market capi• ing•power parity (PPP); by 2007 their share ya it is famous. On June 9th the country’s talisation of nearly $100 billion. was already 14%. The investment bank most popular mobile•phone company, Seven years after Goldman Sachs in• now expects China’s GDP to surpass with 10.5m customers, listed its shares on vented the BRICs acronym, the perfor• America’s before 2030. the Nairobi stock exchange, raising over mance of the emerging stockmarkets is Most economists believe that this up• $800m in the biggest initial public o ering running well ahead of the bank’s high ex• ward trend will not be seriously broken by yet in sub•Saharan Africa. The o ering was pectations. Even after recent falls, at the the current economic slowdown. Nor is it nearly †ve times oversubscribed, and Safa• start of this month Brazilian shares were restricted to the BRICs. In 2005, for the †rst ricom’s share price quickly rose by 60%. up by 345% since November 2001, India’s time since the dawning of the industrial Even sub•Saharan Africa is feeling its by 390%, Russia’s by 639% and China’s, de• age, emerging economies accounted for way towards the emerging•markets band• pending on whether you go by the main• more than half of global GDP at PPP. wagon. In January Goldman Sachs pub• land or the Hong Kong exchange, by 26% or Yet the emerging markets are not mere• lished its †rst bullish report on the conti• 500% (see chart 4, next page). In 2001Gold• ly generating economic growth. They are nent, ŒAfrica Rising, noting at the time man Sachs had predicted that by the end also producing companies that are worth that sub•Saharan stockmarkets in 15 coun• of the decade the BRIC economies would investing in, and that are even starting to 1 4 A special report on globalisation The Economist September 20th 2008

†rms and investment banks are courting ness models and in their products. For in• Hares and tortoises 4 emerging•market companies at which, not stance, Tata Consulting Services, along Share prices, November 1st 2001=100 so long ago, they would have turned up with Indian counterparts such as Infosys 1,200 their noses. McKinsey, a consultancy, has and Wipro, has built up a large organisa• Russia advised Lenovo on how to unite its Chi• tion for outsourcing business processes, 1,000 Hong Kong* nese and American cultures. Goldman serving companies around the world. Ini• India 800 Sachs has appointed Lakshmi Mittal, an In• tially this was a fairly low•tech operation, Brazil dian steel magnate, to its board. thriving largely on India’s low labour China ‘A’ 600 shares Tata rejects suggestions that it overpaid costs. Increasingly, however, it has moved 400 for its acquisitions‹a charge that has been into higher•value businesses, as have its In• levelled at several of the new champions. dian peers. 200 It insists it is paying prices justi†ed by its 100 long•term investment horizon and its phi• Frugal engineering 0 2001 03 04 05 06 07 08 losophy of deep decentralisation that Not so long ago, the most exciting thing *Chinese shares gives plenty of freedom to the manage• about emerging markets was their cheap Source: Thomson Datastream listed in Hong Kong ment teams it acquires (and typically labour. Local †rms supplied †rst manufac• leaves in place). The acquisition of Jaguar tured goods and then services to devel• 2 take on and beat the best of the developed and Land Rover is a case in point. Short• oped markets and multinationals. That re• world’s multinationals. As well as Lenovo, term market pressure may have forced mains an attraction, but a declining one as the new champions listed by Antoine van Ford to sell two †rms that it had done good wages in emerging markets and transport Agtmael in his book ŒThe Emerging Mar• work restructuring, says Alan Rosling, costs go up. No one expects Walmart, the kets Century include Haier, a Chinese Tata’s (British) chief strategist: ŒTata will world’s largest retailer, to rethink its fam• white•goods †rm; Cemex, a Mexican ce• reap the bene†t of all Ford’s hard work. ously eˆcient supply chain, which brings ment company; Embraer, a Brazilian air• Another reason to be optimistic about billions of dollars•worth of Chinese goods craft•maker; Infosys, an Indian software Tata’s growing global reach is its Indian ori• to the developed world. But these days giant; and Ranbaxy, an Indian drug com• gin, which makes it more sensitive to cul• multinational †rms are looking for the pany. The list of emerging †rms in ŒGlobal• tural di erences than many of its peers in skills that workers from emerging markets ity that are said to be Œchanging the game developed countries, claims Mr Rosling. can bring to a job as much as for lower la• in every industry also includes †rms such And in its strategy, the †rm has bench• bour costs. as Goodbaby, which has an 80% share of marked itself against some of the world’s Increasingly, though, the most exciting the market for baby buggies in China and a best companies. It has borrowed ideas thing about emerging countries is the rapid 28% share in America, and the Tata Group, from †rms such as Warren Bu ett’s Berk• growth in the number of consumers in an Indian conglomerate that spans cars shire Hathaway, Mitsubishi, a Japanese their own markets, and in the number of and steel, software and tea. conglomerate, and GE, says Mr Rosling. entrepreneurs to serve them. Already, Lately, Tata, which has operations in 85 The new champions are becoming in• wealthy consumers in these countries countries, has been making a series of creasingly innovative, both in their busi• have proved a godsend to the world’s lead•1 high•pro†le acquisitions that are funda• mentally transforming a company set up in 1868. In 2000 it bought London•based Tetley, an iconic tea company. In 2007, after a †erce bidding war with CSN, a Brazilian steel †rm, it paid $12 billion for Corus, a European steel company. In March this year it paid Ford $2.3 billion for two legend• ary car businesses, Jaguar and Land Rover. Tata could a ord to pay high prices for its acquisitions, re‡ecting the growing †• nancial strength of some of the new cham• pions. In part, they are bene†ting from having large, pro†table shares of fast• growing domestic markets. The rapid de• velopment of domestic †nancial markets in many emerging economies‹not just stock exchanges, but also markets for cor• porate debt‹has also made it far easier to get the capital needed to expand abroad. Equally, rich•country capital markets nowadays are open to and actively recruit• ing emerging•market companies. The New York Stock Exchange is even seeking to list its shares on the Shanghai stock exchange. And the world’s leading consultants, law The Economist September 20th 2008 A special report on globalisation 5

2 ing brands of luxury goods. But the emerg• ing markets’ new middle class may also have helped many new champions along. Ins and outs Goldman Sachs calculates that the glo• bal middle class‹which it de†nes as peo• ple with annual incomes ranging from $6,000 to $30,000‹is growing by 70m a Acronyms BRIC out all over year and rising. By 2030, the bank predicts, another 2 billion people may have joined S IT time to retire the phrase Œemerging tries it expected to enter the economic big this group. At incomes of $6,000 the con• Imarkets? Many of the people inter• league: Brazil, Russia, India and China. He sumption of energy starts to rise, and at viewed for this special report think so. says that the BRICs, Korea and Mexico $8,000•9,000 purchases of higher•value Surely South Korea, with sophisticated Œshould not be really thought of as consumer durables take o , so the growth companies such as Samsung, has fully ‘emerging markets’ in the classical sense, in demand for these things already under emerged by now. And China already has as many still do. We regard these coun• way in emerging countries should contin• the world’s fourth•largest economy. tries as a critical part of the modern glo• ue for many years. The term Œemerging markets dates balised economy. One of the †rst management gurus to back to 1981, recalls the man who invented In its search for de†nitive rigour, the note the rise of the emerging•market con• it, Antoine van Agtmael. He was trying to FTSE group has come up with three cate• sumer was C.K. Prahalad in his book, ŒThe start a ŒThird•World Equity Fund to in• gories for what used to be known as third• Fortune at the Bottom of the Pyramid. He vest in developing•country shares, but his world economies: advanced emerging, argued that to serve these new consum• e orts to attract money were being con• secondary emerging and frontier markets ers‹both in the new middle classes and at stantly rebu ed. ŒRacking my brain, at (which have a stockmarket but perhaps the bottom of the income pyramid‹com• last I came up with a term that sounded not much else). panies will need new business models more positive and invigorating: emerging ŒEmerging markets are places where and products that are pro†table at much markets. ‘Third world’ suggested stagna• politics matter at least as much as eco• lower prices than in rich countries. tion; ‘emerging markets’ suggested pro• nomics to market outcomes, says Ian Companies from emerging markets gress, uplift and dynamism. Bremmer of Eurasia Group, a political• may be more adept than their rich•country Later in the 1980s the fast•growing risk consultancy. That de†nition surely in• rivals at making do with the bare mini• economies of South•East Asia acquired cludes Russia. One Russian billionaire, mum of resources‹Œfrugal engineering, the tag ŒAsian Tigers‹until they ceased after lambasting the Œemerging label as as Carlos Ghosn, the boss of Renault•Nis• to roar during the †nancial crisis of insulting, suggests using Œhigh•growth san, calls it. And it may be much easier for a 1997•98. In 2001 Jim O’Neill, chief econo• economy instead. Sounds good‹but company starting from scratch than for an mist of Goldman Sachs, came up with the what if a recession comes along? That established †rm with a Œlegacy mindset acronym ŒBRICs for the next four coun• might call for a new tag: Œsubmerging. and legacy costs, says Mr Prahalad. The rapid spread of mobile telephony among poorer consumers in the emerging markets opportunity? Soon, he reckons, †rms in park. Still, the Nano will probably sell best is one notable example. AirTel, the Indian emerging markets will develop products in other emerging markets. market leader, charges what may be the that Œstraddle the pyramid‹developing Already, new champions such as AirTel lowest prices in the world‹around two basic high•quality products, but di eren• and Desarrolladora Homex, a Mexican cents a minute for nationwide calls‹yet is tiating between customers at di erent in• builder of low•cost housing, are planning hugely pro†table, thanks to an innovative come levels by adding various Œbells and to take their innovative business models business model in which many of its oper• whistles for the rich. For instance, a mo• and pricing to other emerging markets, bet• ations are outsourced to big multination• bile phone may include a torch•light for ting that they will transfer more easily be• als such as Ericsson and IBM. poorer customers and a fancy camera for tween developing economies than from Safaricom joins a group of emerging• the better•o . developing to developed ones. Homex market mobile•phone companies with a Tata, too, is at the forefront of this frugal• hopes to serve communities Œin highly combined market capitalisation which Mr engineering trend. In January it unveiled populated and underserved areas where Prahalad estimates at $500 billion. ŒPoor its long•awaited Nano, a new Œpeople’s we believe our replicable business model people, once mobilised and provided with car that will be sold for just $2,500. This will be most e ective, says its chief execu• value, can create tremendous wealth for was Œnot just the result of using cheap Indi• tive, Gerardo de Nicolas. business, he says. He sees similar poten• an engineers, says Mr Rosling. Nor is it The company is investing a total of $4m tial in a number of other industries, rang• about accepting lower standards on safety in a joint venture called Homex India and ing from agribusiness to health care and or environmental emissions. The com• has struck an alliance with the Egyptian water to †nance. pany used state•of•the•art virtual design Sawiris business dynasty to build 50,000 technology and global teams to drive gen• new homes in Cairo. Mr de Nicolas is one What it takes to succeed uine innovation. Mr Tata saw the Nano as of a growing number of talented entrepre• Mr Prahalad says he can now answer Œyes a safer alternative for Indian families cur• neurs making waves in countries that hith• to †ve questions he posed seven years ago rently travelling by motorcycle, but con• erto have not seen much entrepreneur• when he launched his pyramid idea. Is sumers in developed countries are already ship‹a very di erent breed from the there a real market? Is it scalable? Is there talking of it as a possible second car for use resource billionaires, the other face of to• pro†t? Is there innovation? Is there a global in towns because, being small, it is easy to day’s emerging•markets business. A new 1 6 A special report on globalisation The Economist September 20th 2008

2 book by Tarun Khanna, ŒBillions of Entre• sible policymaking at home. Neither of governments have long been subsidising preneurs: How China and India are Re• these can be taken for granted in the years for domestic consumers, may have nasty shaping Their Futures and Yours, may be ahead because at least three of the forces long•term consequences. overstating the numbers, but the basic idea behind the recent economic boom no lon• Yet the familiar emerging•market mix is right. ger apply: strong American consumer de• of volatility and bad economic policies For example, in Nigeria, an economy mand, cheap money and cheap oil. In• may have been the making of the most tal• now showing more hopeful signs than for deed, the latest trends in the world ented bosses of emerging•market †rms several decades, oil and mining is a big economy are highlighting signi†cant dif• (admittedly not a large group), forcing deal, but so are consumer•oriented busi• ferences (eg, in reserves of natural re• them to concentrate on cutting costs, rais• nesses such as media. Brazil has a large sources) between emerging economies ing productivity and ensuring a strong number of entrepreneurial start•ups with that tend to be grouped together as if they cash‡ow. ŒSome managers from emerging global ambitions in the clean•energy sec• were essentially homogenous. markets have had to develop certain abili• tor, for example. Fadi Ghandour, a Jordani• ties that are proving very valuable when an who has built Aramex into the ŒFedEx School of hard knocks they go to a †rst•world economy, where of the Middle•East, sees entrepreneurship In turn, this is putting the competence of productivity is crucial, says Antonio Bon• starting to take hold throughout that region economic policymakers in emerging mar• christiano of GP Investments, a big Brazil• as younger people realise that trading kets to the test, with potentially big impli• ian private•equity †rm. ŒLook at Lakshmi ideas may o er a better route to riches than cations for the new champions. In com• Mittal, who has done brilliantly in one of land or oil. modity•rich Brazil, for example, the boom the world’s most basic industries. Admittedly, venture capital is lagging in natural•resource prices and the central Another example is Carlos Brito, the behind other sorts of †nance in establish• bank’s determination to be tough on in‡a• Brazilian chief executive of InBev, a beer ing a presence in emerging markets. Yet al• tion has made the real one of the world’s giant, which in July spent $52 billion on most everywhere in the developing world strongest currencies. This has hurt Brazil• buying America’s Anheuser•Busch to be• the outlook for entrepreneurs is far better ian exporters such as the widely acclaimed come the world’s largest brewer. Like Mr than it was even †ve years ago. new champion, Embraer, whose regional Mittal, Mr Brito has a reputation as an ef• The recent rise of the emerging markets jets have proved an unexpected hit with fective cost•cutter. That said, few old multi• has owed much to the combination of a airlines the world over. The reliance of In• national champions are likely to admit de• benign global economy and relatively sen• dia and China on imported oil, which their feat as easily as Anheuser•Busch. 7 The empire strikes back

Why rich•world multinationals think they can stay ahead of the newcomers

OU get very di erent thinking if you passed through three phases. First came moditised. But the assault on its services ŒYsit in Shanghai or São Paulo or Dubai the 19th•century Œinternational model, business led by a trio of Indian outsourc• than if you sit in New York, says Michael with †rms based in their home country ing upstarts, Tata Consulting Services, Info• Cannon•Brookes, just o the plane from and selling goods through overseas sales sys and Wipro, threatened to do serious Bangalore to Shanghai. ŒWhen you want oˆces. This was followed by the classic damage to what Mr Palmisano expected to to create a climate and culture of hyper• multinational †rm in which the parent be one of his main sources of growth. growth, you really need to live and breathe company created smaller versions of itself So in 2004 IBM bought Daksh, an Indi• emerging markets. Mr Cannon•Brookes is in countries around the world. IBM an †rm that was a smaller version of the the head of strategy in IBM’s newly created worked liked that when he joined it in 1973. big three, and has built it into a large busi• Œgrowth markets organisation, which The IBM he is now building aims to re• ness able to compete on cost and quality brings together all of Big Blue’s operations place that model with a single integrated with its Indian rivals. Indeed, IBM believes outside North America and western Eu• global entity in which the †rm will move that all in all it now has a signi†cant edge rope. ŒThis is the †rst line business in 97 people and jobs anywhere in the world, over its Indian competitors. years of our history to be run outside the Œbased on the right cost, the right skills and Being willing to match India’s low•cost US, he says excitedly, noting that ŒLatin the right business environment. And it in• model was essential, but Mr Cannon• America now reports to Shanghai. tegrates those operations horizontally and Brookes insists that IBM’s enthusiasm for IBM’s thinking about emerging mar• globally. This way, Œwork ‡ows to the emerging markets is no longer mainly kets, and indeed about what it means to be places where it will be done best. The about cheap labour. Je Joerres, the chief a truly global company, has changed radi• forces behind this had become irresistible, executive of Manpower, an employment• cally in the past few years. In 2006 Sam Pal• said Mr Palmisano. services †rm, also thinks the opportunities misano, the company’s chief executive, This ambitious strategy was a response for savings are dwindling. ŒWhen you see gave a speech at INSEAD, a business school to †erce competition from the emerging Chinese companies moving in a big way in France, describing his vision for the markets. In the end, selling the personal• into Vietnam, you think there is not much Œglobally integrated enterprise. The mod• computer business to Lenovo was relative• labour arbitrage left. ern multinational company, he said, had ly painless: the business had become com• Perhaps a bigger attraction now, accord•1 The Economist September 20th 2008 A special report on globalisation 7

2 ing to IBM, are the highly skilled people it can †nd in emerging markets. ŒTen years, even †ve years ago, we saw emerging mar• kets as pools of low•priced, low•value la• bour. Now we see them as high•skills, high•value, says Mr Cannon•Brookes. As for every big multinational, winning the Œwar for talent is one of the most pressing issues, especially as hot labour markets in emerging markets are causing extremely high turnover rates. In Bangalore, for ex• ample, even the biggest †rms may lose 25% of their sta each year. IBM reckons that its global reach gives it an edge in recruitment and retention over local rivals. IBM also says it can manage the risk of intellectual•property theft‹a perennial tablished brand and on the growing pres• and †nance‹all areas in which GE has pro• worry for multinationals in emerging mar• sure on emerging•country govern• ducts to sell. At one meeting GE’s president kets, especially China‹well enough to ments‹even those that are not strictly found himself in the same room with no have cutting•edge research labs in India democratic‹to deliver high•quality, value• fewer than three Vietnamese leaders who and China. And it is starting to Œlocalise its for•money infrastructure. Instead of trying had taken part in a leadership programme senior management, including moving its to sell speci†c products, they say, these at GE’s famous training facility in Croton• chief procurement oˆcer and the head of †rms aim to help governments draw up ville, New York, recalls John Rice, the com• its emerging•markets business to China. plans for improving their country‹plans pany’s head of technology and infrastruc• But as yet it has no plan to move its head• which invariably require substantial ture. This programme of inviting groups of quarters from Armonk, New York, where• spending with the company concerned. 30•40 senior government and business as Halliburton, an energy•services †rm, Both Cisco and GE have recently started es• leaders from a particular emerging coun• shifted its headquarters to Dubai last year. tablishing long•term problem•solving rela• try to Crotonville for a week was launched One notable success has been the com• tionships with governments in which the more than a decade ago, starting with a pany’s partnership with AirTel in the Indi• †rms help to design an infrastructure pro• group from China. ŒWe transfer a lot of an mobile•phone market, which it has al• gramme as well as build some or all of it. learnings between us, and we end up ready extended to other Indian phone friends for life, says Mr Rice. companies and is likely to take to other Buy my strategy Today’s leading multinationals Œare no countries. In this partnership IBM man• Three years ago Cisco combined all its longer the slow•moving creatures they ages much of AirTel’s back•oˆce opera• emerging•markets activities into a single used to be. They are not going to be beaten tions and shares the †nancial risk with the unit. Since then the share of its revenues up like the big American companies were phone company. ŒWe grow as they grow, coming from emerging markets has risen by the Japanese, says Tom Hout, a former says Mr Cannon•Brookes, noting that IBM from 8% to 15%, accounting for 30% of its to• consultant at BCG who now teaches at is now the largest service provider to local tal revenue growth. ŒWe identify the coun• Hong Kong Business School. With Pankaj customers in India. try’s most important industries and go to Ghemawat, who last year published a Risk•sharing has worked well for other them with a blueprint for a strategy to im• well•received book, ŒRede†ning Global multinationals too. Vodafone, for exam• prove them using our technology to beat Strategy, Mr Hout has analysed the ple, is a big shareholder in Safaricom. In global benchmarks; this is about revolu• emerging market in which multinationals June Daiichi Sankyo, a Japanese pharma• tionary not incremental change, says Paul have competed longest against local cham• ceutical giant, bought a 51% stake in India’s Mountford, head of Cisco’s emerging•mar• pions: China. Whether the established Ranbaxy Laboratories. Such deals increas• kets business. multinationals or their local rivals are win• ingly involve strategic partnerships rather In 2006 GE‹which since launching its ning Œdepends on the segment you’re than the joint ventures of old. Daiichi Ecomagination strategy in 2003 has bet big looking at, says Mr Hout. Established Jap• hopes the deal will add value to its re• on a boom in green technologies‹signed a anese and Western multinationals domi• search and development expertise and Œmemorandum of understanding with nate in the high•tech sectors of the econ• provide access to Japan’s fast•growing China’s National Development and Re• omy; the Chinese are strong at the low end. market to Ranbaxy, which in turn brings form Commission to work jointly to safe• The main battleground is in the middle. low•cost manufacturing and an under• guard the country’s environment. It also This is quite di erent from the conven• standing of the generics market. wants to forge relations with local govern• tional wisdom, which is that established In many emerging markets the most at• ment in 200 second•tier Chinese cities, multinationals are getting pushed out by tractive potential customer is the govern• each of which will soon have a population local companies, he concludes. ment, thanks to an infrastructure boom of at least 1m and will need everything A 2007 study by Accenture of China’s that promises to span everything from mo• from a power supply to an airport. top 200 publicly traded companies found bile telephone networks to roads, airports More recently, top GE executives have that the best businesses in China are not and ports, energy and water supply. IBM is got together with Vietnam’s government yet on a par with the world’s foremost not alone in pitching directly to govern• to discuss the huge problems facing the ones. Although their revenue growth in• ments for this business, relying on its es• country in water, oil, energy, aviation, rail creased on the back of China’s continued 1 8 A special report on globalisation The Economist September 20th 2008

2 economic growth, their ability to create around 180 of the top 200 managers are may have been one reason why no Chi• value was still only half that of their global still Americans. ŒThe single biggest chal• nese steel †rms joined their Indian and peers. ŒIt remains to be seen whether Chi• lenge facing Western multinationals is the Brazilian peers in the bidding war for Co• na’s best players have built the manage• lack of emerging•market experience in rus, and why no Chinese carmakers en• ment practices and supporting business their senior ranks, says Mr Ghemawat. tered the battle to buy Jaguar and Land operating models that will allow them to Such companies’ boardrooms are even Rover. ŒIf one could create a Jack Welch in• generate pro†table growth in more mature less globalised. According to Clarke Mur• dex of leadership and assess companies markets over the long term, the study phy of Russell Reynolds, a recruitment on such a measure, the top 50 companies went on to say. †rm, American multinationals now have a from India would come out way ahead of Their legacy thinking and cost struc• Œferocious interest in attracting non•Amer• the top 50 companies from China, says tures notwithstanding, some established icans to the board, but as yet even Euro• Mr Gupta, a professor of strategy at the multinationals are increasingly trying to peans are a rarity, let alone directors from University of Maryland. take on the frugal engineers of the emerg• emerging markets. The share of non• Certainly some Indian †rms are ex• ing markets head•to•head, says Mr Ghema• Americans on the boards of American tremely well run. The senior ranks of Tata, wat. ŒSmarter multinationals have all giv• multinationals is less than 5%. for example, are full of professional man• en up on the idea that they can simply The main problem Œis attendance, espe• agers. On the other hand, many Indian deliver the same old products in the devel• cially if there is a crisis and the board needs †rms are in family ownership, and Œit can oping world, he explains. ŒIf they just fo• to meet a lot at short notice. Once again, be hard to †nd room for professional man• cus on pricing high in mostly urban areas, Goldman Sachs seems to have found a agers when you have several sons de• they will miss out on the mass consumer clever compromise by appointing manding jobs of similar high status, says markets that are emerging. And they have Lakshmi Mittal to its board. The Indian Mr Ghemawat. to be able to compete as cost•e ectively as steel tycoon is based in London and often Perhaps the best•known example of the local †rms, which can mean funda• visits New York, where the investment the problems of family ownership is the mentally re•engineering their products bank has its headquarters. feud between the Ambani brothers, who and business model. Some European †rms are doing slightly after their father’s death divided the fam• A recent report by BCG, ŒThe Next Bil• better than their American counterparts at ily’s huge conglomerate, Reliance, be• lion Consumers, highlighted many inno• internationalising their boards. Nokia re• tween them. The dispute still simmers on. vative business models and products of• cently appointed Lalita Gupte, an Indian In July a bid by Reliance Communications, fered by multinationals such as Nokia‹ banker who had just retired from ICICI run by Anil Ambani, to buy a South Afri• still the biggest mobile•phone producer in bank, one of the world’s most innovative can mobile•phone company was thwarted China, despite frequent predictions that it practitioners of bottom•of•the•pyramid †• by Mukesh Ambani, the boss of Reliance will fall behind a local rival‹and Procter & nance. And leading British companies Industries. No wonder that the brothers, Gamble, as well as similar e orts by have lots of foreigners in their executive who live in the same opulent apartment emerging•market †rms. suites and boardrooms. building, have separate lifts to avoid Moreover, multinationals have great chance meetings. 7 In search of excellent managers trouble retaining the managers they do The decisive factor may turn out to be have in emerging markets, says Mr Hout. management. Although some emerging• ŒWell•trained, good, honest people are market †rms are very well managed, by scarce in emerging markets. Multination• and large established multinationals still als are better at training these people than seem to have the edge. Mr Hout reckons emerging•market companies, which prefer that the expatriate managers now de• to poach them once they are trained. ployed by multinationals in emerging mar• The founders of emerging•market †rms kets are generally of a much higher quality are often impressive, but such †rms typi• than the Œyoung bucks or retirement•post• cally lack the depth of management talent ing types they used to send. ŒThey are ag• of old multinationals, says Mr Hout. The gressive, smart, at the heart of their careers. best students he has taught on MBA And they tend to be married to more courses in Hong Kong and Shanghai have worldly women than management wives typically worked for developed•country used to be. multinationals. That said, the multinationals’ manage• Part of the problem in China is that run• ment advantage is based more on training ning a big company‹even a giant such as and experience of running a large business China Telecom, with its 220m customers‹ than on exposure to other countries. In• still has a lower status than a political job deed, leading multinationals are reducing such as governor of a province. And Chi• their use of expats, and those they do send nese managers, being used to protected are often expected to train a local manager markets, often lack the skill to operate in as their successor. There is still a striking more sophisticated markets overseas. lack of executives from emerging markets Anil Gupta, co•author with Haiyan at the top of developed•country multina• Wang of a forthcoming book, ŒGetting Chi• tionals. Even at GE, which is wholeheart• na and India Right, says that recognition edly committed to emerging markets, of their lack of management capability The Economist September 20th 2008 A special report on globalisation 9

Oil, politics and corruption

Bad capitalism carries its own risks

O MOST Western businessmen, this unexpected things that are every bit as On top of all this, there is the traditional Tsummer’s hounding of Robert Dudley troublesome as emerging•market govern• game of guessing whether governments was clearly the work of the Kremlin. Never ments. If you are an oil or gas company to• will abandon sound †scal and monetary mind that the four billionaires whose day, do you worry more about emerging policy at the †rst sign of economic turbu• court actions drove the British chief execu• markets or a windfall•pro†t tax in the US? lence‹ie, any day now. The leading multi• tive of BP•TNK out of Russia presented it as says GE’s John Rice. Look, too, at the recent nationals insist that emerging markets are an ordinary business dispute over the heavy•handed interventions in the †nan• now so important to their long•term terms of the oil joint venture, rejecting the cial system by the American government. growth prospects that they have to be in idea that their origins in the Soviet Union Yet most business leaders around the them regardless of short•term macroeco• made them Kremlin stooges. (One of them world reckon that political risk is a far nomic policy risks. Gone for ever, they in• told a group of journalists in New York re• greater problem in emerging markets. Ask sist, is the shortsighted old habit of rushing cently: ŒIf you believe that the Kremlin the boss of Carrefour, a French retailer, into emerging markets as they get hot, and likes me, you are very wrong. First, I am whose shops in China saw violent protests out again at the †rst whi of trouble. Jewish. Second, I am rich. Third, I am inde• this year after pro•Tibet campaigners dis• pendent.) To the outside world, this was rupted the progress of the Olympic torch East, west, which is best? yet another reminder of the huge political through Paris. There is not much consensus among lead• risk involved in doing business in Russia. Western oil and mining companies, ing businesspeople about the political Political risk is arguably more pervasive having started to improve their behaviour risks of di erent emerging economies, and fundamental to who makes or loses in Africa under pressure from NGOs, now though they agree that there are huge dif• money than at any time since the second face competition from Chinese, Indian and ferences, even within the BRICs. However, world war. And not just in Russia. Indeed, Russian rivals that seem willing to cut Brazil (by far the richest of the four by in• although political risk is most prevalent in deals with even the most unsavoury Afri• come per person) is widely seen as remain• emerging markets, it is not con†ned to can politicians. And how do Western †rms ing on the up, with the next president ex• them, as Dubai Ports World discovered in compete in countries where bribes are pected to continue with or improve on the 2006 when it tried to buy some American seen as an ordinary cost of doing business? country’s current macroeconomic poli• ports from their British owner, P&O, only Then there are the more humdrum un• cies, and all the bene†ts of lively private to be delayed in Congress. A year earlier certainties about emerging•market govern• and public equity markets, well•run big the Chinese National O shore Oil Com• ments’ attitude to the rule of law. Will theft companies (Vale, Petrobras, Embraer and pany (CNOOC) had tried and failed to buy of intellectual property be punished? Will so on) and an increasingly innovative and Unocal, an American oil company. lax regulatory enforcement allow your entrepreneurial economy. In 2006, when Lakshmi Mittal bid for company’s supply chain to be contaminat• Some of the biggest disagreements are Arcelor, a European steel †rm, he met †erce ed? (For example, Whole Foods Market dis• over Russia. ŒIt’s very risky, but it is also and seemingly racist opposition from the covered in July 2008 that Chinese pow• very pro†table, especially if the Kremlin governments of France, Luxembourg and dered ginger it had been selling as organic likes you, says another of the billionaire Spain, which preferred to see their champi• contained a banned pesticide.) Might the investors in BP•TNK. ŒThey like the Ger• on merge with a Russian rival rather than government issue a decree that alters the mans, are afraid of the Chinese, don’t like with Œa company of Indians, as Arcelor’s fundamentals of your business, without the Americans and British, don’t mind the chairman put it. The deal went ahead only consultation or recourse, as often happens French. Foreigners should probably avoid when India’s government threatened a in China? Will it decide suddenly to break industries that the Kremlin deems strate• trade war. up local monopolies, or alternatively en• gic, but which are they? Oil and mining, ŒDeveloped•country governments do courage their formation? certainly, though that is also where the big•1 10 A special report on globalisation The Economist September 20th 2008

2 gest opportunities lie. Technology, com• challenge bad capitalism. One example is adopting a lower ethical standard, it can mercial aviation, telecoms, chemicals and China•Africa Bridge, an NGO based in Beij• have a corrosive e ect on the entire cor• agriculture are all Œgrey areas, says Ian ing, founded by Hafsat Abiola, daughter of porate culture. Bremmer of Eurasia Group. a former Nigerian president, to improve This may be why the global expansion What about property? Hank Green• the e ect of Chinese business on Africa, es• of emerging•market champions is a good berg, the former boss of AIG, is investing in pecially in resource industries. ŒFor Africa, thing. As they increasingly operate in de• commercial property in Russia because, he China’s involvement will create winners veloped countries, where corruption is says, it is Œnot a strategic industry for the and losers, but currently it will too often be much less acceptable, they will have to government. But Gary Garrabrant, chief African individuals who win, not commu• abide by their host countries’ standards. executive of Equity International, who has nities and countries, she says. In particu• That will create pressure within these been investing in emerging markets since lar, there have been many reports of un• †rms to raise their standards back home. the mid•1990s with Sam Zell, a property ethical dealings between Chinese resource billionaire, is avoiding Russia Œbecause we †rms and leaders and oˆcials of some Af• Doing well by doing good can’t get our arms around the risk. Nor is rican countries, including Sudan. In the early 1990s, when GE decided to he particularly impressed with India, Ms Abiola’s goal is to encourage China adopt uniformly high ethical standards where there is a Œculture of institutional• to do as it would be done by in Africa. throughout the †rm, Œwe accepted it was a ised corruption around obtaining land and When companies such as Microsoft ar• cost, but that the bene†ts outweighed it. permits for development. As for China, rived in China, the government required Siemens reaped the whirlwind on that, Œthere is a huge opportunity in urbanisa• them to invest in a lot of infrastructure and says Mr Heineman. (In 2007, Peter Solms• tion, but stay diverse, below the govern• R&D to foster the country’s own develop• sen, one of his protégés, moved to GE’s ment’s radar. Don’t be a target. ment, she says, Œbut as China comes to Af• German rival as general counsel to sort out The growing importance of emerging rica, it is not being required to transfer a huge bribery scandal that had brought markets has provided plenty of work for knowledge or skills or promote local jobs. down Siemens’s chief executive.) GE em• advisers on political risk from Cambridge Though China is certainly building a lot of barked on this course after the American Energy Research Associates to Oxford An• infrastructure‹presumably to help it pro• government started to enforce its Foreign alytica. ŒThe extractive industries, †rms cure all the natural resources its †rms are Corrupt Practices act more vigorously, and like Shell, got the message about political gobbling up‹it often brings in its own peo• other American †rms asked it to lobby risk 30 years ago, but most of the Fortune ple to do the work. against the law. Instead, Œwe said, level up, 100 weren’t thinking this way until recent• As developed•country multinationals not down, says Mr Heineman. At times ly, says Mr Bremmer. ŒCorporates in the enter emerging economies, it is crucial when corruption was especially rife, GE tech area are among the worst, perhaps be• they do not lower their standards on cor• pulled back in Nigeria and Russia, he cause their management is su used with ruption, says Ben Heineman, a former GE notes. The company also provided some engineers.  general counsel who recently published a early funding to Transparency Internation• Is the political context for business in book, ŒHigh Performance with High Integ• al, an anti•corruption NGO. the emerging markets likely to improve? rity. ŒAre these multinationals going to be GE’s Mr Rice reckons that the †rm’s Tom Hout is encouraged by the experience good corporate citizens, to increase the hard line on corruption is actually helping of Cummins Engine in China. The Ameri• credibility of globalisation? he asks. Be• it win business in many developing coun• can maker of diesel engines has done very sides anything else, he argues, behaving tries. This may be because ethical stan• well in the high•performance segment of consistently ethically is in their self•inter• dards are rising‹or, at a minimum, fear of the market, but has missed out on diesel est. Successful global companies need uni• public reaction to low ethical standards is vehicles lower down the scale that fail to form global cultures, in which everyone rising‹in at least some emerging markets. comply with local rules on emissions. adheres robustly to the same rules, even in Country leaders feel under growing pres• Now, in the more sophisticated cities, Œa places where the local companies do not. sure to deliver better infrastructure and to higher•quality civil servant has started If people in one part of the company start be seen to be doing the best they can, says prosecuting trucks billowing smoke, so Mr Rice. Increasingly, Œthey understand these trucks are being replaced with better that corruption is a barrier to improving ones, using engines made by Cummins Safe as BRICs 5 the standard of living of the poorest peo• and other †rms from developed countries. Political-risk index* ple, and they want to do business more In a similar vein, as Chinese †rms get and more with an ethical †rm. 70 better at developing intellectual property, Brazil But there are plenty of governments they are starting to seek protection for it in 68 that are not striving for good capitalism. court. This has meant that IP rights are be• Oil•rich Russia, for example, feels it can use 66 ing taken more seriously, which should China Gazprom, its giant energy company, as an bene†t foreign †rms too. 64 instrument for its geopolitical strategies, NGOs are beginning to spring up 62 by threatening to turn o supplies to throughout the emerging markets, de• India neighbouring countries that depend on manding higher ethical standards of busi• 60 them. And as emerging•country govern• Russia ness and political leaders. In Africa, for in• 58 ments accumulate huge foreign reserves stance, much of the initial pressure for and start to invest them abroad through better governance and less corruption 2004 05 06 07 08 sovereign•wealth funds, developed coun• came from developed•country NGOs. But *Higher numbers indicate greater tries fear that capitalism will become in• Source: Eurasia Group ability to absorb political shocks now some African NGOs too are starting to creasingly politicised everywhere. 7 The Economist September 20th 2008 A special report on globalisation 11

The rise of state capitalism

Coming to grips with sovereign•wealth funds

OING overseas: a wrong invest• sector has taken ownership of what were possible average oil prices over the next ŒGment decision, thundered Wu Zhi• once government•owned companies. Yet †ve years, all below what the stu has feng on his blog, ŒThe Invisible Wings. He governments are now accumulating va• been selling for in recent months. Even at was furious about the performance of the rious kinds of stakes in what were once $50 a barrel (remember?), the assets of $3 billion investment by China Investment purely private companies through their these sovereign investors will rise to $8.9 Corporation, a sovereign•wealth fund es• cross•border investment activities. Mr trillion by 2013, from $4.6 trillion at the end tablished by the Chinese government, in Summers called for a new policy: ŒGov• of 2007 (see chart 7, next page). shares of Blackstone, an American private• ernments are very di erent from other equity †rm. Blackstone’s shares have economic actors. Their investments For good or ill plunged since its ‡otation in June 2007, re• should be governed by rules designed What are they going to do with the money? ducing the value of CIC’s stake by $500m. with that reality very clearly in mind. Will these funds become instruments of a The Chinese government’s policy of The problem, if problem it be, may be Œnew mercantilism, with the controlling Œgoing out‹investing abroad through its just beginning. According to the US Trea• government attempting Œto ensure that companies and new sovereign•wealth sury, sovereign•wealth funds are Œalready company•level behaviour results in coun• funds instead of at home where it was large enough to be systemically signi†• try•level maximisation of economic, so• needed‹was about showing o to the cant. But the McKinsey Global Institute in cial and political bene†ts, as Ronald Gil• world, wrote Mr Wu: ŒChinese companies a recent report forecast a dramatic increase son and Curtis Milhaupt suggest in a recent started acquiring businesses here and in the assets of sovereign•wealth funds article in the Stanford Law Review? Will there in the world so that many countries over the next few years. It predicts that they be opportunistic, as Larry Summers would shout that ‘the dragon is coming’. Asia’s sovereign assets, which at the end of fears? Will they be politically aggressive, as If some sovereign•wealth funds are un• 2007 stood at $4.6 trillion, will rise to at Russia has already shown itself with Gaz• popular at home, they are viewed with least $7.7 trillion by 2013 on conservative prom (not, strictly speaking, a sovereign• even more hostility in the rich world, growth assumptions, and to as much as wealth fund but certainly a well•endowed where CIC and others have been splashing $12.2 trillion if economic growth continues corporate arm of the state)? their cash lately. Such funds have provided at the fast pace of the past seven years. Or are the funds simply investors, look• several top Wall Street †rms (as well as As for the sovereign•wealth funds of ing for nothing more sinister than a decent some of their European rivals) with large oil•rich states such as Russia, the United return on their money? Earlier this year, injections of cash in the past year‹includ• Arab Emirates and Saudi Arabia, much de• Yousef al Otaiba, Abu Dhabi’s director of ing Citigroup, which received $7.5 billion pends on what happens to the price of oil. international a airs, in an open letter to from the Abu Dhabi Investment Authority McKinsey looked at the impact of several America’s treasury secretary, said that Œit is (ADIA). That probably saved a few of them important to be absolutely clear that the from bankruptcy or a Bear Stearns•style Abu Dhabi government has never and will forced sale, but it was controversial. never use its investment organisations or It is not just banks that have caught the individual investments as a foreign•policy sovereign•wealth funds’ eye. In July the tool. And as Messrs Gilson and Milhaupt Abu Dhabi Investment Company bought a note brie‡y in their article, despite fears 90% share in New York’s iconic Chrysler that sovereign funds will use their invest• Building. Soon after that, Mubadala, an• ments to secure technology, gain access to other Abu Dhabi fund, announced that it natural resources or improve the competi• intended to become one of GE’s ten biggest tive position of their domestic companies, shareholders (see box, next page). Œno one can point to a reported incidence Public criticism of sovereign•wealth of such behaviour. funds has subsided a little as the crisis in In fact, there is no such thing as an aver• the developed world’s †nancial markets age sovereign•wealth fund. Some are new, has made people grateful for any money like China’s; others have been around for they can get. Yet in private there are plenty decades, such as the Kuwait Investment of worries about the growing size and Authority (KIA), set up in 1953. They vary power of sovereign•wealth funds. greatly in size: the biggest is ADIA, which In an article in the Financial Times last with assets of $625 billion is almost double year, Larry Summers, a former American the size of the next•biggest, Norway’s. treasury secretary, wrote that a Œsignal Some, like the KIA, are essentially passive event of the past quarter•century has been portfolio investors. Others are more active, the sharp decline in the extent of direct resembling private•equity †rms (Dubai In• state ownership of business as the private ternational Capital) or even industrial1 12 A special report on globalisation The Economist September 20th 2008

See how they grow 6 Petrodollar foreign assets, $trn Cities in the sand Assuming oil price of: $30 per barrel $70 per barrel $50 per barrel $100 per barrel A new sort of investment partnership FORECAST 12 10 HE deal between GE and Mubadala a total of $40 billion in the partnership. GE 8 Tconcluded in July provides a useful ’s strategy is to establish bases in cit• test case of whether the rise of sovereign• ies throughout the Gulf, investing in 6 wealth funds can be good for capitalism. things that are useful both to the city and 4 Currently, both the company and the in• to the region. It also has close relations 2 vestor are claiming they have gained. with Saudi Arabia, which it has made into 0 There is no doubting the ambition of its regional infrastructure•services hub. 2007 08 09 10 11 12 13 the Gulf states as they set about building Saudi Arabia is building six new Œeco• Sources: McKinsey; Global Insight; BP; brand•new cities in the desert. Dubai has nomic cities, in the hope of providing Institute of International Finance already become a cross between Las Ve• jobs that it desperately needs. It is trying gas and pre•strife Beirut, with its luxury to tempt energy•intensive international 2 holding companies (Singapore’s Temasek). hotels, international †nancial centre, lei• †rms to move there with the promise of Most of them are increasingly shifting their sure and shopping facilities and man• cheap fuel‹which may not be such a focus to equity•investing. Many of them made islands. But Abu Dhabi, its richer boon for the environment. also invest in hedge funds and private•equ• neighbour•cum•rival, has ambitious The Mubadala deal represents the lat• ity †rms. plans of its own, bringing in the sort of est stage of a relationship that has contin• There are big di erences, too, in their high culture Dubai lacks (including out• ued to deepen since the fund’s managers willingness to use professional managers lets of the Louvre and Guggenheim) and visited Crotonville in 2005 for a week’s and in their competence as investors. One even looking beyond the oil age by com• leadership training. GEsays it is betting on reason why CIC bought its stake in Black• mitting $22 billion to building a futuristic a new generation of leaders in Abu stone, and Mubadala its stake in Carlyle, carbon•free city called Masdar. Dhabi‹and indeed across the Middle may have been to tap the investment ex• Masdar is one of the key ingredients of East‹who are committed to building a pertise of those †rms. Another way of rais• the deal, in which Mubadala agreed to be• more sustainable economic foundation ing the quality of in•house sta is to ap• come one of the †rm’s top ten share• that will survive the depletion of their oil point nationals who have gained quali• holders. GE will invest heavily in Masdar and gas reserves. Mubadala, which also †cations abroad. to make it a showcase for its Ecomagina• has a 7.5% stake in Carlyle, a big American Singapore’s Temasek is much admired tion clean•energy programme. The †rm private•equity †rm, says that as a long• by other sovereign•wealth funds for its in• and the sovereign•wealth fund will also term investor it is keen to take big posi• vestment nous and its e ective corporate put $4 billion each into a joint venture to tions in such world•class companies. That governance, and is thought to be seen as a provide commercial †nance in the region. must make Je rey Immelt, GE’s embat• role model by the Chinese. The deepest re• Ultimately, the two are expected to invest tled boss, feel more secure in his job. serves of talent are at ADIA, says a veteran partner at a big American private•equity †rm who has worked with many of the from those applying to funds that try to ington, DC. As things stand, transparency sovereign•wealth funds. However, some concentrate mainly on getting good invest• ranges from next to none to a lot. Again, of its top managers have been taken by a ment returns. some sovereign funds protest that they are new body, the Abu Dhabi Investment Many sovereign•wealth funds have being subjected to far tougher disclosure Council, set up a couple of years ago. been upset by the criticism they have re• rules than many big domestic investors in At the other extreme is the Qatar Invest• ceived over their recent Wall Street invest• developed countries. It will be no surprise ment Authority, which the private•equity ments. America’s treasury secretary, Hank if the IMF proposals are given a lukewarm veteran says is Œalways teaming up with Paulson, is understood to have spent a lot reception and then largely ignored. the wrong people and operating a highly of time reassuring them, especially about ŒThere is a huge amount of hypocrisy idiosyncratic management style. The the reaction to their investments in Wall about sovereign•wealth funds in the QIA’s ill•fated attempt to buy Sainsbury’s, Street, after Merrill Lynch, Morgan Stanley West, says Richard Cookson, a global a British supermarket chain, may alone and others persuaded the funds to shore strategist at HSBC who keeps an eye on have lost the fund over $2 billion, he calcu• them up. ŒThey have lost money and then sovereign•wealth funds. ŒWhen did the lates. been subjected to complaints in Congress developed world ever not use its economic Russia and China may be exceptions, in about the lack of transparency on their bal• and political clout to buy assets on the that both their governments have been ance sheet or their agenda, says the priv• cheap? In the Asian crisis of the 1990s, willing to use the companies they own to ate•equity veteran. American banks bought into several trou• pursue political goals and might well try to To try to reduce the criticism, the IMF bled Asian banks. When local politicians do the same with their sovereign•wealth has been working on guidelines for sover• complained, America accused these coun• funds. If that starts to happen, they may eign•wealth fund transparency, due to be tries of protectionism, says Mr Cookson. need to be governed by di erent rules agreed on at its autumn meetings in Wash• The real reason the developed world is 1 The Economist September 20th 2008 A special report on globalisation 13

2 now so upset, he suspects, is that the sover• depends on the stability of the internation• eign•wealth funds symbolise so clearly the The new moneybags 7 al system. Forms of state ownership will shift in the balance of economic power to Sovereign-wealth fund investments in become more common, she concedes, the emerging markets. Western financial institutions, $bn* Œbut so what? The simple dichotomy be• Yet when emerging countries set up Asian sovereign Petrodollar tween private and state•owned does not sovereign•wealth funds, with separate go• investors investors tell us very much at this point. vernance and a clear investment mandate, 0 2 4 6 8 10 To be on the safe side, Messrs Gilson it is often a sign of them Œrecognising that and Milhaupt propose that shares in they got it wrong in the past, asking how to Citigroup American †rms that are bought by sover• improve, and concluding that an endow• UBS eign•wealth funds should have their vot• ment/portfolio approach is the best way, nil ing rights suspended until they are sold says Chuck Bralver of the Centre for Merrill Lynch again. This would beef up existing ar• Emerging Market Economies at Tufts Uni• rangements that protect American †rms Barclays versity. ŒLeaving the Russians aside, they from foreign ownership where national

are mostly being highly professional. Morgan Stanley nil security is seen to be threatened. Without Even the Chinese sovereign•wealth funds the voting rights, the sovereign investors are expected to hire hundreds of profes• Blackstone nil could not interfere in the activities of the sional investment managers, mainly from Standard Chartered †rms they buy, but if the suspension is developed countries. nil only temporary, the funds would not suf• London SE/Nasdaq nil fer any †nancial penalties. Known unknowns This looks like an elegant solution, but it Apollo nil What is certain is that as sovereign•wealth is not clear if it could be enforced. More• funds grow, which they are bound to do, an Carlyle nil over, it would make sense only if there

increasing number of the world’s compa• nil really is reason to worry about the inten• nies will end up at least partly in state own• Och-Ziff Capital tions of sovereign investors. If their inten• ership. And there is a possibility that the OMX AB nil tions are good, the proposal would rob sovereign•wealth funds’ good behaviour capitalists of their ability to play a value• is a Trojan•horse strategy which in time Source: McKinsey *March 2007 to June 2008 creating role in the governance of the †rms will give way to mercantilist interference. they invest in. In practice, sovereign•wealth funds so ing to use their wealth to generate Œhigher ŒWe need to reconsider what is the best far have given little cause for alarm. Their living standards over the next 100 years, way to organise large•scale entities playing biggest downside may be that they lack the not squandering it on the high life like they in global markets, observes Ms Tyson. capacity to †nd a sensible home for all the did in the 1970s. Despite much talk about After all, in recent years it has become clear money that is likely to be ‡ooding in over their desire to switch to the euro or even that free•market public ownership of com• the coming decades, and that much valu• make it the next reserve currency, Œthey are panies can give rise to con‡icts of interest able capital will be squandered on ill•ad• not dumping the dollar, they are continu• and principal•agent problems, which led vised projects. ing to make long•term investments, she to the rise of private equity as a partial sol• ŒI’m struck by how responsibly China points out. Indeed, bailing out the devel• ution. Perhaps well•motivated, well•run and countries in the Middle East are be• oped world’s banking system seems hero• sovereign•wealth funds with long•term in• having, says Laura Tyson, who used to ically generous of them. vestment horizons could help create a chair Bill Clinton’s Council of Economic All of which, says Ms Tyson, Œunder• more e ective system of corporate owner• Advisers and now teaches about emerging scores the extent to which emerging mar• ship than today’s often short•termist inves• markets at Berkeley. The Gulf states are try• kets now recognise that their well•being tors. Let’s hope so. 7 Opportunity knocks

As long as the protectionists don’t spoil it

E CAN only be de†ned as global, so long ago every country felt it had to Œcustomers to be able to buy our product ŒWsays Lakshmi Mittal. ŒWe are not have its own steel giant, even if it was gov• anywhere in the world at the same quali• Indian, or French, or from Luxembourg. ernment•owned and losing a fortune. ty. He wants to recruit the best talent in Among the top 30 managers of Arcelor Steel was also the †rst Western industry the world, and has established Arcelor Mit• Mittal there are nine di erent national• to go into decline, he points out‹and by ex• tal University in a grand old building in ities. The Indian•born steel tycoon is con• tension, though he does not say it, the †rst Luxembourg to help him do that. vinced that he is building a truly global to be revived by a company started in a de• He is measuring the †rm against the company, transforming an industry that veloping country by a businessman from world’s most admired companies‹GE on was manifestly failing to deliver while it an emerging market (albeit one who has human resources, leadership and purchas• was organised along nationalist lines. Not long been based in London). He wants his ing, Royal Dutch Shell on IT. He sounds like1 14 A special report on globalisation The Economist September 20th 2008

2 a misty•eyed internationalist when he de• book, ŒThe Venturesome Economy, it is in scribes the Œseamless discussion the man• the application of innovations to meet the agement team has on any subject‹you needs of consumers that most economic would not think there are di erent nation• value is created, so what matters is not so alities in the room. In sum, ŒI want to much where the innovation happens but create a truly great global company. where the Œventuresome consumers are Can he do it? Some leaders in the less to be found. America’s consumers show emerged countries where his †rm operates no signs of becoming less venturesome, may see how well he has done with the and its government remains committed to rubbish they thought they had sold him the idea that the customer is king. and demand their pound of ‡esh. Perhaps Except, that is, when it comes to protec• the policy of vertical integration which is tionism, which will hurt American con• prompting Arcelor Mittal to buy mines sumers as well as slow the rise of the and energy producers at today’s high emerging markets and hence the escape of prices will prove to be misplaced. But a big• millions of their citizens from poverty. Far ger threat is what the world’s governments better to engage the emerging markets in may do next. tionism the answer. the global economy and help them under• The rise of protectionist sentiment in stand why it is to everyone’s bene†t to pro• Think abundance developed countries is a serious cause for mote the good models of capitalism, not In particular, how will these governments concern. As Messrs Baumol, Litan and the bad. choose to mix the various models of capi• Schramm observe, capitalism is a dynamic Mr Mittal, for one, remains optimistic. talism described by Messrs Baumol, Litan force and can change over time‹including ŒThere is currently an anxiety in the devel• and Schramm in ŒGood Capitalism, Bad from good forms to bad. Just because oped economies that is the opposite of the Capitalism? Ominously, the governments America, in particular, has long been a enthusiasm in the emerging markets‹but of some of the bigger emerging econo• force for good capitalism does not mean in ten years a lot of the anxiety will go mies‹notably Russia and China‹seem that it will continue that way. away and we will see a lot closer partner• bent on a mixture of state•led and maybe Arguments for protectionism are based ship and collaboration, he says. ŒI don’t oligarchic capitalism, rather than the po• on fears that are wholly at odds with the think we can really block globalisation. tent blend of big•†rm and entrepreneurial evidence. The experience of recent years The †nal word should go to an Ameri• capitalism that has served America, Britain does not support the idea that millions of can, albeit one who works for a Chinese and other rich countries so well. jobs will be outsourced to cheap foreign lo• †rm. Lenovo’s Mr Amelio sees strong par• Should the rich world worry about it? cations. Nor, as so•called techno•national• allels between the challenge raised by the There is no evidence so far that sovereign• ists claim, is it likely that innovation will new age of globality and the cultural chal• wealth funds are trying to wield inappro• shift from America and the rest of the de• lenges his own †rm initially faced, espe• priate in‡uence in the companies they in• veloped world simply because Microsoft cially its American workers’ suspicions of vest in. One day they might, but until then and IBM have set up R&D centres in India their new Chinese colleagues. The root of they probably deserve the bene†t of the and China, as they and the new champi• the problem is a Œscarcity mentality in doubt. The most plausible scenario is that ons start to make better use of all the clever which people see things as a zero•sum the growth of sovereign•wealth funds, engineers produced by those countries’ game, he says. ŒInstead, we need an abun• along with other possibly mercantilist for• education systems. As Amar Bhidé of Co• dance mentality that believes everyone ays by emerging•country governments, lumbia Business School argues in his new can become better o . 7 will simply waste a lot of capital. However unfortunate, that would be largely a mat• O er to readers Future special reports ter for them. Besides, some governments, Reprints of this special report are available at a Countries and regions even undemocratic ones, seem to under• price of £3.50 plus postage and packing. The Koreas September 27th stand that it is in their interests to move in A minimum order of †ve copies is required. Spain November 8th the direction of wealth•maximising good Russia November 29th Corporate o er capitalism rather than squander their Customisation options on corporate orders of 100 Business, †nance, economics and ideas country’s wealth, since it is their citizens or more are available. Please contact us to discuss The world economy October 11th who will ultimately pick up the bill. your requirements. Corporate IT October 25th It is reasonable to worry about the ac• Cars in the developing world November 15th Send all orders to: tivities of, say, Chinese resource †rms in some African countries, which are thought The Rights and Syndication Department to have shored up some of the continent’s 26 Red Lion Square WC1R 4HQ worst leaders‹though it is hard to see how London Tel +44 (0)20 7576 8148 this can be changed other than by reform• Fax +44 (0)20 7576 8492 ing the governance of these African coun• e•mail: [email protected] tries themselves. Likewise, policies in emerging countries that allow corruption, For more information and to order special reports Previous special reports and a list of cronyism and local monopolies or treat and reprints online, please visit our website forthcoming ones can be found online foreign multinationals unfairly are certain• www.economist.com/rights www.economist.com/specialreports ly undesirable. But in neither case is protec•