from Follow the Money

Reverse globalization

March 30, 2007

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Emerging Markets

The phrase the “uphill flow of capital” seems to have caught on.  It is a vivid way of describing a world where poor countries finance rich countries.   Or, a bit more accurately, China and some no-longer-all-that-poor oil exporting countries finance the US.     

I wonder if the term “reverse globalization” will also catch on.  Nasser al-Shaali, chief executive of the Dubai International Financial Center (DIFC) Authority, recently used the term "reverse globalization" to describe one likely long-term consequence of the uphill flow of capital: Emerging markets will be buying companies – not just bonds – in the developed world. 

"Reverse globalization - when you have emerging market players going out and acquiring developed institutions - is a tide that no matter how you try to swing against it, will be very very prevalent in the years to come," he [Shaali] said. 

You can quibble about the term.  Globalization as a term could easily describe a two-way flow of funds around the globe.  Call it financial integration.    That is basically how the transatlantic economy works.  US firms invest in Europe.  European firms invest in the US.  Their respective positions basically balance each other out.   

But “globalization” has not been perceived as a two-way flow of equity investment between the developed and the emerging world, either in the developed or the emerging world.  In the emerging world, globalization meant opening up to US and European and sometimes Japanese firms and capital.  It didn’t mean buying up US or European firms.   It meant letting local firms (including local banks) be bought by US and European firms. 

And in the US and Europe and Japan, globalization often meant the export of US and European and Japanese capital and know-how to the emerging world.  Globalization was often interpreted a process that would lead the rest to adopt US-style market capitalism.    

For example, Frank Lavin – the US under secretary of commerce – recently indicated that China would benefit if it imported more of  the know-how and management savvy of US private equity firms.    

Asked about US equity fund Carlyle’s drawn-out negotiations to buy a stake in Xugong, China’s leading machinery maker, Lavin said China needed such investments to help well-performing firms become internationally competitive by improving their technology and management.  ”The controversy shouldn’t be Carlyle-Xugong,” he told reporters. ”I think China needs 100 Carlyle Groups to come in and buy 100 Xugongs.”  

No doubt there are many Chinese firms with too little debt and too much equity in their capital stock.  But the downhill flow of management and equity control is arguably at odds with the uphill flow of capital.    

US firms investing in China are effectively investing money that the US has borrowed from China, at least in some grand global sense.  The US, remember, doesn’t save anywhere near enough to finance all US domestic investment, less alone to finance US investment abroad. At some point, China – and others – might conclude that rather than lending to US firms at low rates so US firms can make big returns on their investment in China, they would be better off just doing the investment themselve.    No more offshore intermediation.  Read Yu Yongding.   

But it goes beyond that.   When a private equity firm borrows dollars in London (or borrows dollars in New York that the New York institution borrowed from someone in London) to take a US firm private (something that is happening rather frequently right now), the private equity shop is often effectively borrowing Gulf or Chinese savings to help leverage up their returns.   

At some point, investors in Gulf and in China might decide to try to play this game themselves.  Rather than lend their money out to American and European investors -- or take a stake in US private equity firms, as some Gulf families are known to do -- some emerging market economies might use their own funds to go shopping for American and European firms.  It isn't hard to find signs that the big emerging market creditors want to try their hand at getting some of really big returns that have accompanied the “global asset shortage.”   Or at least try to get a better return than they have been getting lending out their funds on the cheap.  

And rather than hire American or European managers, they may conclude that they kind find better management-value-for-their money at home.  US CEOs are not exactly cheap by global standards. That would be a change.  And for the US, a potentially very big change.   The US came to accept Japanese FDI – and some Japanese management practices – in the 1980s.    But the potential shift of control should the current “uphill”  flow of capital from the emerging world become the”uphill” flow of equity capital from the emerging world is far, far larger than anything that happened then.  

 

Remember, creditors – not debtors – traditionally have set the rules of the global financial game.   Right now the US is a debtor – a big one.  But the US still expects to set the rules, more or less.   My guess is that most US business circles still think globalization means something close to the global Americanization of finance and business.   It may.  But it also may not. 

Reverse globalization may not be a bad term. 

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