Access to Global Capital: Investing in Growth

Initiative Launch and Scope:

• The Milken Institute's "Access to Global Capital Initiative" aims to connect multinational companies, investors, and governments to direct capital into emerging and developing markets.
• The initiative targets a 10-to-20-year horizon, seeking to replicate the economic transformation of Singapore over 50 years for a select group of four initial countries: Rwanda, Indonesia, Poland, and Colombia.
• Core strategy involves shining a spotlight on countries improving governance, rule of law, and reducing corruption to encourage investment from large multinationals, which then catalyze supply chain ecosystems.

Capital Flows and Market Trends:

• 85% of the world's investable capital remains concentrated in the West (US and Western Europe), despite growth centers shifting to emerging markets.
• Foreign Direct Investment (FDI) is recovering but has not yet reached pre-2008 crisis levels; however, the trajectory is positive.
• Only 1% of US companies conduct business outside the US, and of those, the majority focus on Mexico and Canada rather than higher-growth emerging regions.
• Private equity valuations (Price-to-Earnings multiples) in Indonesia are currently 50% to 100% higher than in China, signaling a shift in investor preference as China's growth slows.

Investor Sentiment and Regional Preferences:

• Private equity investors, particularly US pension funds, show a resounding interest in Asian markets but a "no" to expanding beyond Asia into other emerging regions.
• Latin America is viewed as the secondary market of interest following Asia.
• Sub-Saharan Africa has recently entered investor radar screens within the last three to four years but remains challenged by small market sizes and infrastructure deficits.
• Central and Eastern Europe face limited interest due to market size (excluding Poland) and perceived contamination from the broader European economic crisis.

Country-Specific Insights:

• Indonesia:
  • Foreign investment surged 400% from $4 billion in 2006 to $24 billion recently.
  • The economy contracted by 13% during the global financial crisis but is now the second-highest growing economy in Asia after China.
  • Public perception of corruption remains high at 88%, though the government has prosecuted high-ranking officials, including generals and judges, to demonstrate commitment to reform.
  • Key investor requirements include job creation (specifically good jobs), environmental friendliness, and long-term commitment to local workforce development.
• Ghana vs. South Korea:
  • At independence in 1960, Ghana and South Korea had identical GDP levels; over 45 years, South Korea's GDP grew significantly while Ghana's rose only 75%, highlighting the impact of governance and policy choices.
• Jamaica vs. Singapore:
  • 50 years ago, Jamaica and Singapore had the same GDP; Singapore's trajectory as a financial and knowledge hub demonstrates that replicable growth is possible without prior technology reliance.

Operational Challenges and Risks:

• Infrastructure Deficit: In Africa, low wages are offset by high operational inefficiencies (e.g., lack of reliable electricity), making the cost of doing business higher there than in China.
• Political Instability: Investors generally avoid markets where stability ends after the next election cycle; Kenya's recent peaceful election highlighted the risks of uncertainty that can shutter economies.
• Corruption Management:
  • US firms have a structural advantage via the Foreign Corrupt Practices Act (FCPA), while competitors from France may utilize bribery, complicating the competitive landscape.
  • Some investors have exited corrupt markets entirely (e.g., a medical device company leaving Greece) or found ways to operate where courts remain functional despite broader corruption (e.g., China).
• Governance Variance: Rule of law and judicial independence vary drastically; India's British-inspired system is described as "impossible to deal with," whereas China's politicized courts can sometimes offer fairer hearings for specific cases.

Role of Development Finance Institutions (DFIs):

• The Overseas Private Investment Corporation (OPIC) operates with a $16 billion asset base, self-sustaining through returns paid to the Treasury.
• OPIC focuses on frontier markets, particularly Sub-Saharan Africa (approx. 30% of commitments), Southeast Asia, and the MENA region (post-2010).
• Priority sectors include SME financing, renewable energy, and project finance for large infrastructure (up to $250 million per deal).
• Private sector allocation does not mirror OPIC's; DFIs are more willing to enter "where no man has gone before" compared to private capital which favors established markets.

Investor Requirements for Capital Inflows (Panel Consensus):

• Stability and Predictability: The primary consensus is that investors require predictable rules, consistent taxation, and adherence to the rule of law regardless of political transitions.
• Infrastructure: Critical need for consistent power, logistics, and human capital (healthcare, clean water) to support long-term employment and demographic growth.
• Responsive Bureaucracy: Governments must provide responsive channels for investors to resolve issues quickly and treat foreign entities as partners.
• Fiscal and Monetary Policy: Sound management of currency stability is a prerequisite for investment; volatile currencies (e.g., historical Zimbabwe inflation) deter capital entirely.
• Workforce Development: A need for a more educated middle-management workforce to effectively implement operations and follow up on investment projects on the ground.