Impact of the Internet Age on the Economics of Business
Patrick A. McNutt
w w w . P a t r i c k m c n u t t . c o m
• Paradigm shift
• FDI and Creative
• Structured Finance,
• Investment Signals
Old paradigm GDP = C + I + G + (X – M) still used in macro-models
Old economy FDI = retained profits
New economy FDI = asset-seeking FDI (low cost locations) and efficiency-seeking FDI
(information and communications)
New paradigm GDP = X + FDI + (G + C)
Since 1990: Cross-border capital flows have been rising at an annual rate of 10.7%, adjusted for inflation and exchange rates.
From 1980 – 1990 annual rate of 4.3%
MENA has witnessed YOY average increase of 95% due to global demand for petrochemical products.
Explain the increase
Information has created connected markets allowing key suppliers of capital to supply across borders and across currencies:
Example: DIFX and world portfolio funds or QSTP
100% foreign ownership or China-Egypt
Top 5 FDI Recipients 2005-2009
UAE, Turkey, Egypt, Saudi Arabia, Morocco
FDI Flows to MENA [inc Turkey]
13.4% share of Developing World FDI
FDI Stocks as % Real GDP (average adjusted)
Middle East [inc Turkey]: 11.9%
North Africa: 24.8%
Chemicals and chemical products
Hotels and restaurants (Saudi Arabia)
Yarn spinning mills (Turkey)
Amusement and recreation (Dubai)
Connected markets exist because of the
markets are now locally controlled…..data warehouses, IT processing, international brokerage, supply chain management, technology transfer, information-sharing.
What are the consequences?
Global growth is increasingly driven by
Emerging Market [EM] economies.
Key EMs are China, Russia and India
Emergent debt is still supported by strong economic fundamentals.
More Governance: Example: IAIGC
Membership, zero customs duties under
Greater Arab Free Trade Area
Information and Communication Will Define the Opportunities
Information is now a commodity with positive costs.
Communication costs are falling.
Information processing = risks + mixed signals
Hybrid portfolio of PE and HF focusing on distressed opportunities.
Strong global growth has come with falling capital costs and a wider use of quants to reduce credit risk.
FDI = investment in transfer of technology, IPRs and technology licensing agreements.
Key Drivers of investment opportunities
Pressure on EM currencies and exchange rates:
EM currencies to continue fluctuation against US$ and Euro.
Global outsourcing and local restructuring:
Focus on exposure to core products – energy, utilities, materials, equipment suppliers.
Real interest rate policy in Key EMs:
Negative: Impact on confidence of investors to
Central Bank money as store of value.
Positive: Appreciating currency.
Not ‘bricks and mortar’
‘Trade in e-
Between 1980-1998, US, EU and Japanese companies signed 9000 strategic technology alliances: New economy companies with costless entry
Churning equilibrium: goes beyond traditional
FDI of bricks & mortar’ to FDI as ‘information bridge’ in technology and information flows.
Information is a tradable resource for the distribution of technology and innovation with FDI potential.
Example of New Paradigm
Increased Intra-nation trade: only 25% of Asian exports go outside Asia.
US, EU and Japan share of global economy is falling [60% in 2009] and expected to approximate 50% in 2020.
More co-operation and technology transfers: FDI
Chinese-Egyptian Business Council 2006 or
Singapore-China Trade Mission 2009
New Paradigm Recommendations for
Strategic exposure to Key EMs
with currency regime linked to US$ with rising inflation with rising commodity prices exposure to high yield corporate bonds prefer credit over equities prefer equities over government bonds
Emerging markets: young population, technology transfer, creative industries, and
EMs, GCC, MENA, ASEAN and BRIC
More FOREX Non-dollar Assets and the role of US $.
EMs’ Equity markets: High P/E due to high GDP growth = Flows of FDI as purchase of shares.
FDI and Creative Industries
Virtual surgery or High-Tech Tourism
Smartphone technology or Telcos
Prime Brokerage or Portfolio Fund
Understand the ‘information bridge’ in the
Template for FDI Investment
Asset-seeking FDI = Case C
Efficiency-seeking FDI = Case B
Market-seeking FDI = Case A
Virtually assisted microsurgery
Next generation antibiotics
Template Case B: Smartphone
Template Case C: Prime Brokerage
Monetary policy does not work
Moral hazard embedded in risk analysis
Data availability in the cloud
Virtualisation of both product and process
Example: (i) IT infrastructure delivered as a service
(ii) Convert data into strategy and insight
(iii) 50% increase on average in Business expenditure on information processing equipment and software since
Mismatch in Risk Signals
Weightless companies: $x invested in physical assets, $y invested in sales & capitalisation:
Yahoo, Microsoft, Apple, Google…………….???
$y >> $x
Analyst advice: Strong SELL to SELL
Panic as Consensus ‘Sell’ and Price Falls
Deviation of Equity values from Fundamentals
Macro economic trends moving towards intra-nation trade and exchange rates as policy tool. Case
I EMs and ASLEEP economies to account for 50% of world trade and
30% of world exports by 2015.
Case II production drives demand in oil and core scarce resources.
Micro economic trends with technology transformations. Case
III vertical handset manufacturers transform to horizontal computer markets. Case IV global insourcing with mobile workforce.
Case V increased mobile banking and e-purse payment methods.
S&P 500: 40% of revenues from foreign sales.
50% of world’s equity capital is now outside the US.
Nascent bubble in EMs depends on sustained growth in China: 10% of
What lies ahead in brokerage:
What lies ahead in brokerage:
• Herding and Panic
• Virtualisation and absence of scarcity in resources
• Latest technology
• Signals v company fundamentals
• Ease of trade ease of entry v
Markets remain irrational longer than you remain solvent: short term investors ‘rent’ rather than ‘own’ shares
Long term investment in Asia as they decouple from US and EU as Asia bouyed by increasing domestic demand
Costs But High
EU Mifid Directive with brokers beholden to prove best deal for clients in creative industries
Strategic Trade Alliances like Egypt-China and China- Singapore with investment opportunities