Impact of the Internet AgeImpact of the Internet Ageon the Economics of Businesson the Economics of Business

Patrick A. McNuttPatrick A. McNuttw w w . P a t r i c k m c n u t t . c o m w w w . P a t r i c k m c n u t t . c o m

Outline of PresentationOutline of Presentation

There is a Paradigm Shift in There is a Paradigm Shift in Economics: Greater Role for FDIEconomics: Greater Role for FDI

Old paradigm Old paradigm GDP = C + I + G + (X – M) GDP = C + I + G + (X – M) still used in macro-modelsstill used in macro-models

Old economy FDI = Old economy FDI = retained profitsretained profits New economy FDI = New economy FDI = asset-seeking FDI asset-seeking FDI

(low cost locations) and efficiency-seeking (low cost locations) and efficiency-seeking FDI (information and communications)FDI (information and communications)

New paradigm New paradigm GDP = X + FDI + (G + C)GDP = X + FDI + (G + C)

Cross-border FDI capital flowsCross-border FDI capital flows

Since 1990: Cross-border capital flows have Since 1990: Cross-border capital flows have been rising been rising at an annual rate of 10.7%, at an annual rate of 10.7%, adjustedadjusted for inflation and exchange rates.for inflation and exchange rates.

From 1980 – 1990 annual rate of 4.3%From 1980 – 1990 annual rate of 4.3% MENA has witnessed YOY average increase of MENA has witnessed YOY average increase of

95% due to global demand for petrochemical 95% due to global demand for petrochemical products.products.

Explain the increaseExplain the increaseInformation has created Information has created connected markets connected markets

allowing key suppliers of capital to supply allowing key suppliers of capital to supply across borders and across currencies:across borders and across currencies:

Example: Example: DIFXDIFX and world portfolio funds or and world portfolio funds or QSTPQSTP 100% foreign ownership or 100% foreign ownership or China-EgyptChina-Egypt

Intra-Regional FDI FlowsIntra-Regional FDI Flows

Top 5 FDI Recipients 2005-2009Top 5 FDI Recipients 2005-2009UAE, Turkey, Egypt, Saudi Arabia, UAE, Turkey, Egypt, Saudi Arabia,

MoroccoMorocco FDI Flows to MENA [inc Turkey]FDI Flows to MENA [inc Turkey]13.4% share of 13.4% share of Developing WorldDeveloping World FDI FDI

FDI Stocks as % Real GDP (average FDI Stocks as % Real GDP (average adjusted)adjusted)

Middle East [inc Turkey]: 11.9% Middle East [inc Turkey]: 11.9% North Africa: 24.8%North Africa: 24.8%

Example of ‘Classic’ FDI Targeted Example of ‘Classic’ FDI Targeted IndustriesIndustries

Chemicals and chemical products Chemicals and chemical products (Bahrain)(Bahrain)

Telecommunications (Kuwait)Telecommunications (Kuwait) Hotels and restaurants (Saudi Arabia)Hotels and restaurants (Saudi Arabia) Yarn spinning mills (Turkey)Yarn spinning mills (Turkey) Amusement and recreation (Dubai)Amusement and recreation (Dubai)

Connected marketsConnected markets

Connected markets Connected markets exist because of exist because of the Internet: the Internet: globalglobal markets are now markets are now

locally controlled…..data locally controlled…..data warehouses, IT processing, warehouses, IT processing,

international brokerage, supply chain international brokerage, supply chain management, technology transfer, management, technology transfer,

information-sharing.information-sharing.

What are the consequences?What are the consequences?

Global growth is increasingly driven Global growth is increasingly driven by Emerging Market [EM] economies.by Emerging Market [EM] economies.

Key EMs are China, Russia and IndiaKey EMs are China, Russia and India Emergent debt is still supported by Emergent debt is still supported by

strong economic fundamentals.strong economic fundamentals. More Governance: Example: IAIGC More Governance: Example: IAIGC

Membership, zero customs duties Membership, zero customs duties under Greater Arab Free Trade Areaunder Greater Arab Free Trade Area

Information and Communication Will Define Information and Communication Will Define the Opportunitiesthe Opportunities

Information is now a commodity with positive costs.Information is now a commodity with positive costs. Communication costs are falling.Communication costs are falling. Information processing = risks + mixed signals Information processing = risks + mixed signals

OPPORTUNITIESOPPORTUNITIESHybrid portfolio of PE and HF focusing on distressed Hybrid portfolio of PE and HF focusing on distressed

opportunities.opportunities.Strong global growth has come with falling capital Strong global growth has come with falling capital

costs and a wider use of quants to reduce credit costs and a wider use of quants to reduce credit risk.risk.

FDI = investment in transfer of technology, IPRs and FDI = investment in transfer of technology, IPRs and technology licensing agreements.technology licensing agreements.

Key Drivers of investment opportunitiesKey Drivers of investment opportunities

Pressure on EM currencies and exchange rates:Pressure on EM currencies and exchange rates:EM currencies to continue fluctuation EM currencies to continue fluctuation

against US$ and Euro.against US$ and Euro.Global outsourcing and local restructuring:Global outsourcing and local restructuring:

Focus on exposure to core products – energy, Focus on exposure to core products – energy, utilities, materials, equipment suppliers.utilities, materials, equipment suppliers.

Real interest rate policy in Key EMs:Real interest rate policy in Key EMs:NegativeNegative: Impact on confidence of investors to : Impact on confidence of investors to

Central Bank money as store of value.Central Bank money as store of value.PositivePositive: Appreciating currency.: Appreciating currency.

..

Real Time Information FlowReal Time Information Flow

FDI & New EconomyFDI & New Economy

Between 1980-1998, US, EU and Between 1980-1998, US, EU and Japanese companies signed 9000 Japanese companies signed 9000 strategic technology strategic technology alliancesalliances: New : New economy companies with economy companies with costless entrycostless entry

Churning Churning equilibrium: goes beyond equilibrium: goes beyond traditional FDI of bricks & mortar’ to FDI traditional FDI of bricks & mortar’ to FDI as ‘information bridge’ in technology and as ‘information bridge’ in technology and information flows.information flows.

Information is a Information is a tradabletradable resource for the resource for the distribution of technology and innovation distribution of technology and innovation with FDI potential.with FDI potential.

Example of New ParadigmExample of New Paradigm: : Trade co-operationTrade co-operation

Increased Intra-nation trade: only 25% of Increased Intra-nation trade: only 25% of Asian exports go outside Asia.Asian exports go outside Asia.

US, EU and Japan share of global economy US, EU and Japan share of global economy is falling [60% in 2009] and expected to is falling [60% in 2009] and expected to approximate 50% in 2020. approximate 50% in 2020.

More co-operation and technology More co-operation and technology transfers: FDI transfers: FDI ~ ~ Chinese-Egyptian Chinese-Egyptian Business Council 2006 or Singapore-China Business Council 2006 or Singapore-China Trade Mission 2009Trade Mission 2009

New Paradigm Recommendations for New Paradigm Recommendations for FDI flows FDI flows

Strategic exposure to Key EMs Strategic exposure to Key EMs

with currency regime linked to US$with currency regime linked to US$

with rising inflationwith rising inflation

with rising commodity prices with rising commodity prices

exposure to high yield corporate bondsexposure to high yield corporate bonds

prefer credit over equitiesprefer credit over equities

prefer equities over government bondsprefer equities over government bonds

New Geo-political orderNew Geo-political order

Emerging markets: young population, Emerging markets: young population, technology transfer, creative industries, and technology transfer, creative industries, and FOREX reserves:FOREX reserves:

EMs, GCC, MENA, ASEAN and BRICEMs, GCC, MENA, ASEAN and BRIC

More FOREX Non-dollar Assets More FOREX Non-dollar Assets and the role of US $.and the role of US $.

EMs’ Equity markets: EMs’ Equity markets: HighHigh P/E due to P/E due to highhigh GDP growth = Flows of FDI as purchase of GDP growth = Flows of FDI as purchase of shares.shares.

Post-Internet Agesince 1988 (arrival of home

PC and www URL)‘virtual’ investment

FDI and Creative IndustriesFDI and Creative IndustriesEU BenchmarkEU Benchmark

Creative Industries:Creative Industries:

EXAMPLESEXAMPLES

Virtual surgery or High-Tech Virtual surgery or High-Tech TourismTourism

Smartphone technology or TelcosSmartphone technology or Telcos

Prime Brokerage or Portfolio Fund Prime Brokerage or Portfolio Fund ManagementManagement

New FDI New FDI Investment OpportunitiesInvestment Opportunities

Understand the ‘information bridge’ Understand the ‘information bridge’ in the in the TemplateTemplate for FDI Investment for FDI Investment

Asset-seeking FDI = Case CAsset-seeking FDI = Case CEfficiency-seeking FDI = Case BEfficiency-seeking FDI = Case B

Market-seeking FDI = Case AMarket-seeking FDI = Case A

Template: Case A: Virtual surgeryTemplate: Case A: Virtual surgery

Template Case B: Smartphone Template Case B: Smartphone TechnologyTechnology

Template Case C: Prime BrokerageTemplate Case C: Prime Brokerage

Investment ClinicInvestment Clinic

Investment CycleInvestment Cycle

Information ProcessingInformation Processing

Data availability in the cloud Data availability in the cloud Virtualisation of both product and process Virtualisation of both product and process

ExampleExample: (i) IT infrastructure delivered as a service: (i) IT infrastructure delivered as a service(ii) Convert data into strategy and insight (ii) Convert data into strategy and insight (iii) 50% increase on (iii) 50% increase on averageaverage in Business in Business

expenditure on information processing expenditure on information processing equipment and software since 1990sequipment and software since 1990s

Mismatch in Risk SignalsMismatch in Risk Signals

Weightless companiesWeightless companies

Mismatch in Risk SignalsMismatch in Risk Signals

Weightless virtual companiesWeightless virtual companies

WeightlessWeightless companies: $x invested in companies: $x invested in physical assets, $y invested in sales & physical assets, $y invested in sales & capitalisation: Yahoo, Microsoft, Apple, capitalisation: Yahoo, Microsoft, Apple, Google…………….???Google…………….???

$y >> $x$y >> $x Market Market PanicPanic

Analyst advice: Strong SELL to SELLAnalyst advice: Strong SELL to SELLConsensus: HOLDConsensus: HOLD

Panic as Consensus ‘Sell’ and Price Panic as Consensus ‘Sell’ and Price FallsFallsDeviation of Equity values from FundamentalsDeviation of Equity values from Fundamentals

Investment SignalsInvestment Signals S&P 500: 40% of S&P 500: 40% of

revenues from foreign revenues from foreign sales.sales.

50% of world’s equity 50% of world’s equity capital is now outside the capital is now outside the US.US.

Nascent bubble in EMs Nascent bubble in EMs depends on sustained depends on sustained growth in China: 10% of growth in China: 10% of World GDP.World GDP.

Case ICase I

Macro economic trends moving Macro economic trends moving towards intra-nation trade and towards intra-nation trade and exchange rates as policy tool. exchange rates as policy tool. Case ICase I EMs and ASLEEP EMs and ASLEEP economies to account for 50% economies to account for 50% of world trade and 30% of of world trade and 30% of world exports by 2015. world exports by 2015. Case II Case II production drives demand in production drives demand in oil and core scarce resources.oil and core scarce resources.

Micro economic trends with Micro economic trends with technology transformations. technology transformations. Case IIICase III vertical handset vertical handset manufacturers transform to manufacturers transform to horizontal computer markets. horizontal computer markets. Case IVCase IV global in-sourcing global in-sourcing with mobile workforce. with mobile workforce. Case V Case V increased mobile banking and increased mobile banking and e-purse payment methods.e-purse payment methods.

Concluding……..Concluding……..

What lies ahead in brokerage: What lies ahead in brokerage: FDI/Macro Trends?FDI/Macro Trends?

What lies ahead in brokerage: What lies ahead in brokerage: FDI/Micro Trends?FDI/Micro Trends?

Private Equity: PrognosisPrivate Equity: Prognosis

Prognosis for FDIPrognosis for FDI

Predict an Information Overload!!Predict an Information Overload!!

THANK YOU

‘’do not wait for the stream to stop before crossing it’’