Political risk in private participation projects: The effects of political discretionality and corruption

This article investigates the impact of political risk on the performance of private participation infrastructure projects in emerging markets. Previous studies have shown that firms in regulated sectors are prone to employ political capabilities in their investments overseas. Our analysis of 32,257 projects in 114 emerging countries from 1997 to 2013 shows that higher political discretionality in the host country is negatively associated with project completion. In contrast, a higher level of corruption in the host country is positively associated with project completion. The study makes a contribution to the literature on political risk in foreign direct investments.     

Equity investment prospects in emerging markets

The Mexican debacle in late 1994 had a contagious, if short-lived impact on emerging markets. Evidence suggests that fund managers panicked and withdrew investments. Portfolio equity flows to emerging markets decreased by more than a third in 1995. The investor base shrank. The longterm case for investing in emerging markets is, however, very strong. Most of them are growing faster, some much faster, than developed countries, and are likely to yield higher returns on investment. By one estimate, emerging markets will increase their share of world stock market capitalization from 15 percent in 1995 to 45 percent in 2010. The article will review the trends in private capital flows and prospects for the future, focusing on opportunities in East Asia as an example. The author discusses the investment strategies that help explain the panic of 1995 and proposes a more analytical approach to investment in developed markets and the information needed to facilitate its adoption.     

Business innovations from emerging market countries into developed countries: Implications for multinationals from developed countries

This article addresses innovation and emerging‐market countries. Both are important topics in the business world today. The focus of this article is on the importance of innovation and market development in emerging‐market countries by Western multinational companies typically based in North America and Western Europe. The authors of this article argue that as Western multinationals innovate and develop emerging markets, this will give multinationals the opportunity not only to compete effectively in emerging markets but also to protect their home markets in developed countries. Implications for Western multinationals are discussed. © 2012 Wiley Periodicals, Inc.     

Indian economy and Indian private equity

India's gross domestic product has been growing at more than 8% in the past few years, making it the fourth‐largest economy in terms of purchasing power parity. According to a Goldman Sachs report, India could become the second‐largest economy in the world by 2050. The key growth drivers are investments in infrastructure, domestic consumption, and a hub for global outsourcing. This is further supported by growth‐oriented policies by the government. The favorable environment has led to the growth of the private equity market. India received approximately U.S. $17.5 billion of investments in private equity in 2007, making it the number‐one destination in Asia. Indian private equity has been mainly focused on providing growth/expansion capital to the company as compared to buyouts in the developed markets. © 2008 ICICI Bank Limited. Printed with permission.     

Bailing in the private sector

During the last decade, there has been a significant bias towards bond financing on emerging markets, with private investors relying on a bail-out of bonds by the international community. This bias has been a main cause of the recent excessive fragility of international capital markets. The following paper shows how collective action clauses in bonds contracts help to involve the private sector in risk-sharing. It argues that such clauses, as a market-based instrument, will raise the spreads for emerging market debt and so help to correct a market failure towards excessive bond finance. Recent pressure by the IMF to involve the private sector faces a conflict between the principle of honouring existing contracts and that of equal treatment of bondholders.     

Decentralization and Firm Investments: Evidence from China

Taking advantage of decentralization reform that enlarges the authority of county government in China, we construct a quasi‐experiment. Using a large sample of Chinese firms, we show that after the implementation of decentralization reform, firms located in decentralized counties experienced a significant increase in investment expenditure compared with other firms. We also find that after the decentralization reform, state owned enterprises (SOEs) experienced greater increase in investment expenditure on average compared with non‐SOEs, and that, within non‐SOEs, collective firms have an even larger increase in investments, followed by foreign firms and private firms. Further analysis shows that the influence of decentralization reform was more significant in more developed markets, and that the increased investment was associated with improved productivity, which was more pronounced in SOEs. These results are robust to an alternative sample and endogeneity issues. Overall, these findings support the view that decentralization reform improves government efficiency and creates positive externalities, thereby encouraging firms to invest.     

Socially Responsible Institutional Investment in Private Equity

This article studies institutional investor allocations to the socially responsible asset class. We propose two elements influence socially responsible institutional investment in private equity: internal organizational structure, and internationalization. We study socially responsible investments from Dutch institutional investments into private equity funds, and compare socially responsible investment across different asset classes and different types of institutional investors (banks, insurance companies, and pension funds). The data indicate socially responsible investment in private equity is 40–50% more common when the decision to implement such an investment plan is centralised with a single chief investment officer. Socially responsible investment in private equity is also more common among institutional investors with a greater international investment focus, and less common among fund-of-fund private equity investments.     

Country risk,country risk indices and valuation of FDI: a real options approach

Country risk, and in particular political risk, may constitute a large part of the total risk investors face when investing in emerging markets. It is not a straightforward task to quantify and include these types of risks in the evaluation and valuation of real investments. We suggest a method involving country risk indices. The approach is based on the real option approach for valuation of real investments.     

When Do State-Owned Firms Crowd Out Private Investment?

This paper examines the conditions under which a state-owned firm with a political agenda strategically crowds out investment by a private firm. Employing reduced-form analysis, we show that strategic crowding out occurs if (i) the private firm regards investments as strategic substitutes, and (ii) private investment is undesirable from the state-owned firm’s perspective. We discuss how our analysis applies to real-world markets and argue that it provides an explanation for the ambivalent evidence on the effect of public on private investment: State ownership is neither necessary nor sufficient for crowding out to occur.     

中国对发达国家直接投资动因与障碍分析——以比利时为例

中国正逐渐成为全球对外直接投资的崛起力量,中国企业对海外市场的拓展引起了世界各国决策者以及公众媒体的关注。本文通过对Berhmann分类法以及Dunning折衷范式的补充,分析了中国企业对发达国家直接投资的动因与障碍。中国企业对发达国家直接投资宏观动因主要包括中国政府政策激励、发达国家投资环境激励、国内市场饱和压力、发达国家贸易保护主义压力;微观动因为寻求外部市场和战略资产。在发达国家直接投资过程中,中国企业不存在明显所有权优势和内部化优势,利用东道国区位优势的能力有待加强。通过对在比利时投资的中国企业实地调研,发现受访中国企业在比利时的投资活动处于初级阶段并遇到很多障碍,真正融入比利时乃至欧盟市场尚需时间。     

Pay-performance sensitivity and risk-taking behaviors: Evidence from closed-end funds

The pay-performance sensitivity (PPS) of managers of closed-end funds is explicitly specified in their contracts as the marginal rate of the funds' net asset value. Using a sample of US closed-end funds from 2006 to 2009, this paper investigates the relationship between the PPS and risk-taking behaviors of fund managers. After controlling for endogeneity, we find that fund return volatility and fund PPS positively determine each other. Furthermore, the positive relationship is more pronounced for closed-end funds engaging in alternative investments or in emerging markets.     

Emerging markets and the Multilateral Development Banks

Flexible, innovative institutions are integral to meeting the development challenges of the next century. Multilateral Development Banks have been the focus of intense criticism, and that criticism is now resonating from increasingly organized opposition groups. As the MDBs strive to increase their private sector focus by adopting a range of promarket policies, they are caught in a race against time. Countries and firms alike are turning to emerging capital markets for funding traditionally sought from MDBs. Are the Banks capable of transforming themselves into efficient, responsive and effective institutions? Or will they become historical footnotes? Lacking a coherent and reasoned defense, the difficult job of maintaining public support may become impossible.     

The drivers of domestic acquisitions in People's Republic of China: a resource-based analysis

Domestic acquisitions of firms in emerging markets have so far evaded scholarly interest. This article contributes to closing this gap by looking into the drivers of cross-province acquisitions in the People's Republic of China, covering 569 deals in manufacturing industry conducted between 1999 and 2012. Drawing on the resource-based view, this study looks at prior Chief Executive Officer (CEO) experience and organizational slack as two drivers of cross-province acquisitions, and analyses the moderating effects of firm ownership types and the location of an acquiring firm. The results show that private firms having CEOs with experience outside of the home province are the drivers of cross-province acquisitions in China.     

Private equity exits in emerging markets

Using deal level data from 2733 private equity (PE) deals from 35 emerging markets, we find that PE fund managers have a higher probability of successful exits in countries with better business and legal environments. We also find that they are able to mitigate the potential costs associated with inefficient and corrupt business environments to increase the probability of exits by IPOs in countries with higher levels of corruption. Moreover, we find that market shocks in the developed markets result in a negative ripple effect as the probability of successful exits, especially by way of IPOs, decreases in emerging markets.     

Foreign direct investment in emerging markets and acquirers’ value gains

We investigate the shareholder wealth effects of 306 foreign direct investment (FDI) announcements by UK firms in seventy-five emerging markets (EM). Our results show that acquirers enjoy highly significant gains during the announcement period of FDI. Perhaps surprisingly, the highest gains are accrued to acquirers investing in countries with high political risk and high corruption ratings. The type of asset acquired has also a significant effect on the gains of acquirers’ shareholders, with the highest gains accrued to acquirers of physical assets. Also, investments in physical assets in EM with a high corruption rating elicit the highest gains. We contend that UK firms following resource-seeking strategies in EM with a high corruption rating are facilitated access to resources on favorable terms and this is viewed positively by the market participants. Our results are robust to alternative model specifications and the endogenous choice to expand internationally.     

Financial Globalisation and Emerging Markets Volatility

The volatility of capital flows to emerging market (EM) countries and frequency of financial crises have imposed high welfare costs on the countries involved. The empirical literature provides, at best, a mixed picture on the relationship between long‐run EM country growth and financial integration. Meanwhile, the prevailing policy discourse regarding reform of the international financial system remains incomplete: the focus has largely been on either institutional and policy measures required of EM countries or international crisis‐resolution procedures. The role played by private financial markets and institutions in the developed world has not received adequate attention. This paper describes some of the structural features inherent in today's financial markets that directly contribute to the instability in EM capital flows.     

The interplay between home and host country institutions in an emerging market context: Private equity in Latin America

This study examines how the interplay between home and host country regulatory institutions affects the investment strategy of private equity (PE) firms in an emerging market context. To answer this question, we consider three different mechanisms: (1) the institutional hazard avoidance effect, (2) the institutional escapism effect, and (3) the dysfunctional institutions effect. Contrary to conventional wisdom, we argue that regulatory institutional differences between home and host countries can sometimes have a positive rather than a negative effect on investment likelihood. Our findings show that when a host emerging market has a strong regulatory institutional system relative to other emerging markets, it is more likely that this country will attract PE investments from firms based in home countries with very strong and very weak institutional systems. The empirical analyses, based on a polynomial specification and a dataset covering more than 300 PE firms that made close to 1500 investment transactions in Latin America during 1996–2011, are consistent with our main theoretical arguments.     

Private Equity Finance as a Growth Engine: What It Means for Emerging Markets

Entrepreneurship has long been considered crucial for economic development. An important element of entrepreneurship is the willingness and ability to mobilize private capital from both domestic and foreign sources. The private equity sector in the Middle East and North Africa (MENA) illustrates the role that private capital can play in the development of emerging markets. Data on the employment generation and growth performance of private equity provide evidence that it is an important driver of economic growth globally. This paper draws on initial evidence from the MENA region to illustrate the sector's potential there and in emerging markets generally. It then recommends a new generation of reforms to fuel this growth engine. A survey of MENA’s private equity industry survey conducted for this paper assesses these developments and the sector's need for proactive reforms to support it. It also shows that international financial market interest in private equity finance does not seem to have abated with the recent market bust. The paper concludes by identifying priority areas for future policy and research. JEL Classification O160     

Foreign investments as a form of enterprise strategy

During the course of 1980 West German enterprises and private persons were responsible for approximately DM 8.16 bn in foreign investments. The sum total of German foreign investments has now reached a level of DM 74.2 bn. Both these figures indicate the increasing internationalisation of the German economy, at the same time suggesting that a considerable wealth of experience has been acquired by German firms already resident abroad, which could facilitate entry into foreign markets for possible investors. With this in mind a survey of German subsidiary companies in 17 countries was carried out, the aim of which was to obtain close to the market information on the problems, conditions and background details entailed in any particular undertaking abroad.     

The long-term performance of privatization-related ADR issues

American depository receipts (ADRs) have been increasingly used in the share issue privatization process (SIP) by privatizing governments, both in developed and developing countries. In this study, long-term performance of 143 privatization-related ADR programs were analyzed. The ADR programs covered in the study were initiated between 1984 and 1999 and included a diverse mix of companies from 29 different industries across 31 developed and emerging markets. The analysis of the long-run performance of these programs revealed interesting patterns. In all cases, average cumulative returns and average cumulative abnormal returns of developed country privatization-related ADRs exceeded emerging market privatization returns. The same conclusion was reached using an alternative return calculation methodology. While sample companies generally outperformed their respective country indices and the FT World Index, they under performed the S&P 500 Index. In addition, findings indicate that Level I issues traded in over-the-counter (OTC) markets outperform the Level II and Level III ADRs traded in the NYSE, as well as 144A private placements.