Investment in Emerging Markets:
the Challenges of Infrastructure Development
- Panel 1) Current Challenges: Assessing and Protecting against Risk
- Panel 2) Promoting Regulatory Reform through International Institutions: the Changing Role of the IMF and World Bank
- Panel 3) Financing Transactions with Emerging Markets: Identifying Factors for Effective
- Panel 4) New Interactions: Public-Private Investment to Improve Infrastructure Development
Professor of Sociology and Director of the Center on Globalization, Governance & Competitiveness at Duke University
This paper explains the Global Value Chain (GVC) framework and how it can be used in the context of emerging markets. It will analyze the historical evolution of economic policies and developments in emerging markets. It will also assess how GVCs interact with national policies and can effect infrastructure development in emerging markets and the potential to employ GVCs for both economic and social upgrading. The paper will draw examples from the emerging markets of China, Brazil, Mexico and South Africa.
Panel 1) Current Challenges: Assessing and Protecting against Risk
Moderator: Jonathan Wiener
William R. and Thomas L. Perkins Professor of Law at Duke University School of Law
Professor of Environmental Policy & Professor of Public Policy
Latin America Regional Compliance Counsel at Halliburton
The landscape of anti-corruption laws has changed dramatically, and any investor considering operating in the developing world must factor this evolving environment into its risk-benefit calculations. With aggressive enforcement from authorities in the United States, Europe, and China and new or enhanced laws being passed globally, for example in the United Kingdom, Canada, Mexico, and Brazil, investors must be certain that they have the resources and tools to prevent, detect, and respond to potential improper activity and improper payments. Failing to account for these risks and compliance program expectations can have significant financial and criminal implications, such that they simply cannot be ignored when making investment decisions.
Partner at Jones Day Shanghai
Multi National Corporations (MNCs) operating in China face a unique set of corruption challenges and risks. On one hand, there are certain systemic factors that increase corruption risk, such as a growing wealth gap, wages that have not kept pace with rapid inflation, a culture that glorifies the accumulation of material wealth, a one-party system that concentrates power and encourages its abuse, and extensive government involvement in the private sector. On the other hand, both the Chinese government and the U.S. government have ramped up their anti-corruption enforcement efforts in order to regulate how MNC conduct themselves in China. The U.S. government has imposed substantial monetary fines for corrupt behavior and the PRC government has recently indicated a desire to do the same (as well as a willingness to seek prison time for individuals who have violated anti-bribery laws). Understanding where risks are, where strong controls must be implemented, and how one’s own employees often seek to circumvent the company’s own policies has become crucial for companies operating in China.
Associate Professor of Law at University of Wisconsin Law School
Jason Yackee will discuss the potential for international investment law to improve the investment climate of emerging economies, protect against “political risk” and, in consequence, to increase investment flows. He will highlight conceptual and methodological difficulties in showing that international investment law is likely to, or actually does, significantly increase investment, and he will present results from an original empirical study of investment promotion agency practice (IPAs) showing that IPA marketing efforts for emerging economies typically do not focus on international investment law when crafting their marketing pitches to potential investors.
Associate Professor, Ocean University of China School of Law and Political Science
J.S.D. student, The University of Chicago Law School
Disclosure of Legal Risks Relating to China-Based Securities
Market practices have been developed over the years by professional intermediaries with respect to disclosing in offering documents of China-based securities a range of legal and compliance risks relating to China’s investment environment. One question to consider is how useful the information provided through such legal disclosure is in terms of helping investors, especially those outside of China, understand relevant risks. Through examining disclosure practices adopted with respect to different risk factors, the speaker will discuss practical challenges faced by capital markets practitioners in disclosing China-related risks and how those challenges may affect the utility of information disclosure as an investor protection tool.
Panel 2) Promoting Regulatory Reform through International Institutions: the Changing Role of the IMF and World Bank:
Moderator: Steven Schwarcz
Stanley A. Star Professor of Law & Business at Duke University School of Law
Associate Dean for Faculty Research & Professor of Law at Tulane University School of Law
The IMF and Emerging Markets’ Policies Regarding Capital Flows
Despite the importance of policies regarding capital movements for domestic and global financial stability and the inherent international nature of this activity, there is surprisingly little international coordination regarding cross-border capital flows. In recent years, the IMF has begun to take a more active role in providing such coordination despite ambiguities regarding its jurisdiction in this area. This project explores the trends in domestic policies related to cross-border capital flows, especially among emerging market economies, and the IMF’s evolving role in influencing those policies.
Professor of Law at Warwick School of Law
Discussion of the IMF and World Bank FSAP program and what lessons emerging markets can learn post the financial crisis assessments for regulatory reforms and design, looking at both pre-conditions and conditions for an effective system of financial regulation and supervision to reduce the risks of systemic crises and create a stable environment for investment.
Advisor at the World Bank – Financial and Private Sector Development
Many of the factors shaping the environment in which economic policies are formulated lie well outside the control of most policy makers, especially those in the developing world; global interest rates, the international prices of primary commodities, the quality of macroeconomic management in the larger economies, are all examples that come to mind. But the rules and regulations that governments choose to put in place to underpin private sector activity are largely homemade. Whether the rules are sensible or excessively burdensome, whether they create perverse incentives or help establish a level playing field, whether they safeguard transparency and encourage adequate competition—all this is largely within the control of governments. As governments over the past decade have increasingly understood the importance of business regulation as a driving force of competitiveness, they have turned to Doing Business as a repository of actionable, data providing useful insights into good practices worldwide.
Panel 3) Financing Transactions with Emerging Markets: Identifying Factors for Effective Investment
Moderator: Antonia Stolper
Senior Partner at Shearman & Sterling in Capital Markets and head of Capital Markets – The Americas and the Latin America Affinity Group
Jose Felix Magana
Head of Capital & Financial Markets for the Central American Bank for Economic Integration (CABEI)
Proximity from a geographical and cultural perspective makes Latin America an appealing story for foreign investors. Beyond commodities exploitation, and probably fueled by a relative more stable political environment and low beta financial and FX markets, there has been a recent renewed interest in investing in this region. Data from the Eclac’s report on “Foreign Direct Investment in Latin America and the Caribbean” for 2011 shows a healthy rebound, 28%, from 2010 levels, already surpassing pre-financial crisis figures. Bond markets have played along FDI growth, most of the countries in the region came to markets the last 2 years including some interesting newcomers such as Bolivia and Honduras and an unprecedented number of financial institutions, all of them, chasing cheap funds from yield starving investors. Familiarity with the region and booming bond market have created a space for infrastructure investing, however, there are a number of key aspects that shall be taken into consideration, from pricing to format to governing law. What type of liquidity spread shall apply? Is local support necessary? There’s a need for multilateral involvement? How strong is the public-private partnership? Is the format market friendly? How to hedge it? along with other questions shall be addressed prior to consider an investment. From a practitioner perspective, I will try to discuss some of the more relevant aspects of the investing process, focusing on the characteristics that may make an infrastructure project marketable.
Assistant Professor of Economics at Duke University
Daniel Xu will respond to what makes transactions financeable from the angle of Foreign Direct Investment (FDI) in China by presenting some research on how Taiwanese producers decide on investment locations in China, and how a parent firm affects its affiliate firm’s profitability.
Senior Associate, Macquarie Infrastructure and Real Assets
Macquarie pioneered infrastructure as an investment asset class almost 20 years ago. Today it is the world’s largest manager of infrastructure and also has a growing portfolio in real estate, agriculture and energy investments. Dan will provide a private equity perspective on infrastructure investments in emerging markets, starting with a brief overview of the typical fund lifecycle and then applying that model to investing in emerging markets.
Panel 4) New Interactions: Public-Private Investment to Improve Infrastructure Development
Moderator: Rachel Brewster
Professor of Law at Duke University School of Law
Co-Director of the Center for International and Comparative Law
Visiting Professor at Duke Center for International Development (DCID) and the Sanford School of Public Policy, Duke University
Richard Hemming will discuss some of the fiscal policy challenges involved in developing public private partnerships (PPPs) in infrastructure. More specifically, he will argue that rather than taking the pressure off government finances and improving efficiency, which are benefits that are often claimed by advocates of PPPs, they can end up doing neither. For the most part, governments seeking to step up infrastructure investment and get better value for money spent on infrastructure will have to look elsewhere.
Professor of Sociology and Director of the Center on Globalization, Governance & Competitiveness at Duke University
Emerging economies have expanded their role dramatically in the global economy over the past decade. Infrastructure investments are essential not only to facilitate the growth of diversified trade in emerging economies, but also to ensure that this trade helps to ignite job growth and the expansion of forward and backward linkages to improve their productive capabilities and upgrading opportunities at the national level. Emerging economies are also utilizing a range of new industrial policy instruments to try to ensure that the gains from trade are not only broadly distributed within their domestic borders, but also that infrastructure investments will improve the prospects for regional economic integration and cross-border clusters within the global value chains of greatest significance to these emerging economies.
Assistant Professor, Rutgers School of Law–Newark
Social finance is a growing area of international and domestic investment activity where investors seek to generate positive social and environmental impact alongside financial returns. Focusing on the example of microfinance in developing countries, Sarah Dadush will discuss some of the risks involved with social finance and argue for upgraded regulatory systems to address those risks.
Lecturer in Law and Transactional Clinic Fellow at University of Chicago School of Law
In recent years, sovereign wealth funds (SWFs) have risen in number, grown substantially in total assets under management, and realigned their investments in response to the financial crisis and other economic changes. Faced with weak or unreliable returns from relatively liquid assets such as fixed income and public equities, SWFs have devoted rising proportions of their portfolios to longer-term investments, including infrastructure projects in emerging markets, at the same time that other types of investors have approached such investments more cautiously. As a result, SWFs have become increasingly important sources of capital for these projects. Our discussion will explain these recent trends in further detail, analyze their present impact upon such projects, and explore what this may mean for economic development in these regions.