Companies from the developing world are one of the rising forces of world capitalism. They may be changing the rules of the game.
So far this year, the flow of funds in corporate acquisitions between rich and poor countries is just about even—$128 billion (Rs5.09 trillion) from developing to developed against $130 billion in the other direction, according to data provider Dealogic. The balance is expected to tip towards developing countries by the end of 2007. That’s a huge change from 2000, when companies from rich countries spent five times as much buying companies in poor countries as the other way around. In that year, developing country buyers acquired about $30 billion of Western assets, while Western companies acquired $150 billion of developing country assets.
The poor-to-rich corporate cash flows reflect two broad trends. First, as poor countries get richer, local companies get bigger and more sophisticated. Second, the huge US trade deficit, largely with poor countries, has created a massive pool of dollars for foreign investment—$3.5 trillion of sovereign wealth funds, according to Morgan Stanley.
As far as operations are concerned, the rising titans generally follow the established corporate ways. But when it comes to strategy, many of the new companies are different. They are owned by, or close to, governments. Much of the new money from developing countries comes from sovereign wealth funds; those of Kuwait, Saudi Arabia, Dubai, Abu Dhabi and Qatar total $1.5 trillion. That means that politics and prestige often play a big role in corporate decision-making.
It’s often hard to parse the mix of motivations. When Brazilian iron ore miner CVRD snapped up the Canadian Inco for $15 billion last year, it talked about the long-term returns on investment.
But many observers thought that national pride played a part in the calculations.
Similarly, in the current battle over the London Stock Exchange, Dubai and Qatar want the profits, but they both also want to become the leading Middle Eastern financial centre. On 20 September, Dubai acquired 28% of the London Stock Exchange and Qatar 20%.
And with $1.3 trillion of oil money in the region’s coffers, a lower return on a $7 billion investment just doesn’t look as significant. The new corporate giants challenge the commitment of developed world governments to free trade in corporate control.
Carlos Slim, the Mexican billionaire with close ties to his government, may be a welcome investor. But when the Russian Gazprom comes knocking, it’s hard to believe that geographical diversification is the only interest.
The trend is so new that developed country governments are still scrambling for a response. But it’s a safe bet that politics on one side will beget politics on the other.