India Knowledge@Wharton | Let sovereign wealth funds be

India Knowledge@Wharton | Let sovereign wealth funds be
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First Published: Mon, Nov 26 2007. 12 25 AM IST
Updated: Mon, Nov 26 2007. 12 25 AM IST
The Bombay Stock Exchange’s Sensitive Index (Sensex) plunged more than 9% on 17 October after Indian regulators proposed placing controls on foreign investments. But foreign capital comes from many sources—and not all of them represent cause for alarm.
Sovereign Wealth Funds (SWFs), which manage and invest the national savings of different countries and account for $2.5 trillion (approx. Rs98.25 trillion)in assets, are rapidly moving to the forefront of international finance.
According to Vinay B. Nair, a senior fellow at the Wharton Financial Institutions Center and a visiting professor at the Indian School of Business, such funds should be allowed to invest and thrive in India—though investors and government officials should be careful abouttheir motives.
While investors have reasons to welcome the liquidity that such funds bring, Nair points out that many governments are concerned these investments could be used for strategic purposes. But curbing capital inflows is unlikely to be helpful, he argues. “Such regulations are often blunt instruments,” he writes in an India Knowledge@Wharton op-ed, noting that capital is a necessary ingredient for India’s economic growth.
Moreover, those who advocate restrictions are overlooking an important benefit of SWFs, he adds: “These funds sometimes open the doors to reciprocal investment opportunities.”
The presence of SWFs deserves “attention, not alarm. It is important to pay attention to the nature of the SWF.… Funds of countries where the investment process is far removed from the politics and those based in democratic regimes are relatively safe options.”
Until best practices for SWFs are determined by the International Monetary Fund or the World Bank, Nair writes, Norway’s SWF “remains the model” for its diversification, excellent transparency and its adherence to the UN principles of responsible investment. “Stopping foreign inflows into Indian markets is undesirable,” he says, “but getting to know the identity of foreign capital through better disclosure is a good idea.”
Online log critical to country’s entrepreneurship
Entrepreneurs love to grumble about the roadblocks and delays created by bureaucrats. Government officials, they say, are slow, bumbling and concerned only about sticking to the rules and clocking out at 4.55pm. But in a study of global entrepreneurship, Raffi Amit and Mauro Guillen, both Wharton management professors, have found that a simple, and smart, bureaucratic initiative mattered critically in determining a country’s level of entrepreneurship.
Specifically, countries that created electronic business registries saw far higher levels of new business formation than those with traditional paper ones. Even the announcement that a country planned to establish an online log led to a jump in business registrations.
How could such a small change make such a big difference? “It represents the removal of red tape,” says Amit. “Red tape is the big barrier to entrepreneurial activity. It takes three months in some places to register a new company versus doing it in 10 minutes on a website. An electronic registry removes all the intermediaries, and the need to pay bribes.”
In cooperation with staff members at the World Bank, Amit and Guillen gathered data from 84 countries in every region of the world. Their goal was to gauge levels of entrepreneurship and, as much as possible, explain why developed countries exhibit much higher levels of entrepreneurship than developing ones. Their research is summarized in a paper, Entrepreneurship and Firm Foundation Across Countries.
Differences in the rates of entrepreneurship around the world are stark. At one extreme, Asia produces only 1.6 businesses per 1,000 people while, at the other, industrialized nations create 64.2 per 1,000, Amit, Guillen and their co-authors say. On top of that, new businesses continue to enter the economy at a faster rate in developed countries than in developing ones. Industrialized countries see average entry rates of more than 10% a year, while developing ones see an average of about 7-8.5%.
Improvements brought by electronic registries show themselves quickly. Guatemala, Sri Lanka and Jordan each saw more than 20% increases in their number of new business registrations within just a few years of implementing their electronic systems.
“In Jordan and Guatemala, the growth of new firms begins before the implementation of the reform, usually about four years earlier, when the modernization plan was announced and initiated,” the scholars write.
A criticism of this study might be that electronic registries don’t actually capture levels of entrepreneurship but merely the movement of businesses from the informal sector—sometimes referred to as the “underground economy”—to the formal one (once it becomes easy to register, informal firms decide to do so). Amit and Guillen argue that this sort of nit-pick misses the point. If a government manages to encourage existing firms to register by cutting red tape, then it has still improved its entrepreneurial ecosystem. And chances are, a friendlier environment will lead to the formation of more firms.
Indian CEOs focus more on internal management
Do Indian CEOs and business leaders operate in a way that is markedly different from those in other parts of the world? What is the source of their competitive advantage? Can other managers learn from their experiences? Four Wharton management professors—Peter Cappelli, Harbir Singh, Jitendra Singh and Michael Useem—set out to answer these questions by interviewing 100 chief executives of leading Indian companies. Their findings are summarized in a new study, The DNA of Indian Leadership: The Governance, Management and Leadership of Leading Indian Firms, co-sponsored by India’s National Human Resources Development Network.
In contrast to US business leaders, the researchers found, Indian CEOs tend to be more preoccupied with internal management, long-term strategic vision and organizational culture. Financial matters, on the other hand, are not at the top of their agendas. In addition, the research showed that Indian leaders seem to care a good deal more about motivating employees and setting an example than about currying favour with shareholders or the markets.
Harbir Singh, who is now dean of the Nanyang Business School in Singapore, explains that the reason why Indian CEOs tend to focus more on internal issues involving people is that India, unlike the US, has no “safety net”—such as unemployment benefits or social security—for employees once a company lets them go. “In the US, CEOs often see shareholders or the board as their primary constituency. In India, CEOs need to focus on employees because of the safety net factor. Now, the Indian economy is booming, and there is a shortage of talent, so investing in employees is the right thing to do. In fact, it is the right thing to do, even in the US.”
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First Published: Mon, Nov 26 2007. 12 25 AM IST