Prof. Javier SantisoVice President, ESADEgeo

Professor of Economics, ESADE Business School

Europe and Latin America’s Investment Relationship & Sovereign Wealth Funds

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2015 A.T. Kearney FDI Confidence Index

Country ranking on how political,

economic, and regulatory

changes are likely to affect foreign

direct investment (FDI) inflows in the

coming years

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European Countries Represented

• Investment Relationship between Europe and Latin America

• Sovereign Wealth Funds (SWFs)– Introduction to SWFs– European perspective on SWFs– The Paradox of Plenty: Norway vs. Venezuela– Opportunities for Europe

• Writing exercise on today’s lesson

• Conclusion

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Lesson Road Map

5Source: Eurostat

Outward stocks of FDI, EU-27, end 2012

European Investment

Latin America = 16% of the pie

European Investment in Latin America

Students: what’s in the news?

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1) Netherlands

2) Spain

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Which two European countries are the largest investors in Latin America?

Source: UN ECLAC

• 2nd largest investor in Latin America among European countries

• Spain continues to be highly committed to the region

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The Case of Spain

Source: Invest in Spain

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- Common historical, cultural, and linguistic roots. Institutional network relationships.

- Strong economic and business ties: Spanish companies have invested in strategic sectors in Latin America.

- Good communications: Spain is a major connecting hub for airlines.

- Latin American multinational companies are choosing Spain for their European headquarters.

- Multinational companies are increasingly choosing Spain for their Latin American headquarters.

Spain as a Gateway to Latin America

Why is Spain an attractive hub for doing business in Latin America?

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Managing Operations from Spain

The following multinational companies are managing operations in Latin America or the EU from Spain.

Source: Invest in Spain

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• Shifting away from the US and toward Europe

• Latin American FDI flows towards the EU– 2006-2009: between $2 billion

and $2.5 billion– 2010: $12 billion

• Approximate investment between 2006-2010:– Brazil (71%)– Colombia (18%)– Chile (11%)

Latin American Investment Destinations

Companies from Latin America (especially from Mexico, Brazil, and Colombia) are increasingly interested in investing in Spain

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Latin American Investment in Spain

Source: Invest in Spain

The 5 Ws of Sovereign Wealth Funds (SWFs)

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What are SWFs?

Source: The Global Context

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19531816 2005

When were SWFs created?

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Europe is one of the major SWF investment destinations

Where do SWFs come from?

• “Dutch disease”

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Why are there SWFs?

Source: Offshore Technology Source: Rediff

vs.

SWFs can play the role of insulating the domestic economy from large sources of wealth, which might otherwise cause a distortion in the economy

Q1Q1: __________ (how much money (US$)?) are in the hands of around __________ (how many?) different SWFs.

A1A1: $7 trillion; 80

Q2Q2: The top ten SWFs manage __________ (what percentage?) of the $7 trillion?

A2A2: 80%

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Who are SWFs?

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Top 4 Investment Sectors:

•Financial Services

•Real Estate & Construction

•Commodities

•Infrastructure

How do SWFs invest?

Group 1 (Pros): Discuss the benefits of SWF investment in Europe

from the European perspective

Group 2 (Cons): Discuss the drawbacks/concerns of SWF investment in Europe from the European perspective

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European Perspective on SWFs

The Paradox of Plenty:Norway vs. Venezuela

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Two natural paradises…

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“Blessed” by nature…

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With very different outcomes

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Key Indicators

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Norway’s Resources

• Largest holder of crude oil and natural gas reserves in Europe (U.S. EIA)

• 3rd largest oil-exporting nation in Europe (Norway)

• World’s 3rd largest natural gas exporter in 2014 (after Russia and Qatar) (BP)

• Supplies around 20% of Western Europe’s gas needs (Norway)

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Source: U.S. EIA

Venezuela’s Resources

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Source: OPEC

• Contains some of the largest oil and natural gas proven reserves in the world (U.S. EIA)

• Owned 25% of OPEC proven oil resources in 2014 (OPEC)

• 3rd largest exporter of crude oil to the United States in 2013 (U.S. EIA)

• World’s 9th largest exporter and 12th largest producer of petroleum and other liquids in 2013 (U.S. EIA)

• Venezuela’s oil revenues account for about 95% of export earnings. The oil and gas sector is around 25% of GDP. (OPEC)

• 2nd largest natural gas reserves in the Americas, behind the United States. Much of the natural gas is used to bolster production in its mature oil fields. (U.S. EIA)

The SWFs

Norway• Government Pension Fund Global (GPFG)

• Market value of about $900 billion

• Owns 1.3% of the world’s listed companies

• Taken a deliberate decision to give preference to investments in European companies and to penalize stakes in North American, especially U.S., companies

• One of the world’s most transparent SWFs and with the best corporate governance

Venezuela• Macroeconomic Stabilization Fund (FEM)

• Market value of about $1 billion

• In 2003, the government withdrew $6 billion to cover the fiscal budget

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Differences in Outcomes

29Source: Invest in Spain

Opportunities for Europe

Groups:1. Real Estate2. Infrastructure3. Private Equities4. Human Capital

Brainstorm: What are Europe’s potential opportunities (related to SWF investment) in each of these fields?

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Note: the information on the following four slides comes from:

López, Diego. "The Major Role of Sovereign Investors in the Global Economy: A European Perspective." In The Global Context: How Politics, Investment, and Institutions Impact European Businesses, edited by Javier Solana and Angel Saz-Carranza, 86-109. Barcelona, Spain: ESADEgeo, 2015.

Real Estate• “Since the mid-70s, sovereign

investors have poured over $65 billion into the European property markets”

• Largest investors:– ADIA– Qatar Investment Authority (QIA) – Kuwait Investment Authority (KIA) – Government of Singapore

Investment Corporation (CIC) – SAFE

• Eyeing European secondary cities 31

Opportunity for “European financial institutions holding large portfolios of non-core real estate assets and/or those in need of liquidity”

Infrastructure• Previously, foreign investors were banned from

acquiring European airports, ports, and highways

• The financial crisis changed it all

• Non-European sovereign entities now own (but do not operate) some of the main European structural assets, including:– Airports– Power & utilities conglomerates– Nuclear energy companies– Highway operators – Telecoms

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“Opportunity for European governments, not only to raise money from the privatization of established companies, but also from developing infrastructure project where the financial muscle of sovereign investors and the operational expertise of their partners can add an even greater value”

Source: The Global Context

Private Equities

• Generally associated with Small and Medium Enterprises (SMEs), i.e., the backbone of the European economy (European Commission)– 99 out of every 100 non-financial businesses in Europe are SMEs– 2 of every 3 employees are employed at SMEs – 58 cents in every euro of value added are produced by SMEs

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“The acquisitions of sovereign investors in European healthcare…could be one of the main industries of focus in the next few years, in addition to the always-preferred industrial products and consumer-related European companies.”

Human Capital

• Thousands of skilled professionals—especially young graduates—have left the continent since 2008

• “This brain drain may be a blessing in disguise for Europe if, as in the case of China and Russia, it is reversed, luring executives back to their home countries after having gained an invaluable experience investing in the global markets.”

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“The new focus of sovereign investors on direct investments, alternative assets, and new geographies can represent an opportunity for European economies.”

Source: European Commission

Three-minute Paper

Please write for 3 minutes about what you have learned in today’s session and why the information is important for EU businesses.

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Conclusion

Questions?

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This powerpoint presentation and the matching teaching plan were developed as a part of the Jean Monnet project MEKBiz (Mainstreaming EU Knowledge in Business Studies and Strategy), hosted by ESADEgeo – Center for Global Economy and Geopolitics and partially funded by the European Commission.

“The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”