We talk about the present and future of emerging markets every day, and discuss how they are flourishing or slowing. China had a growth boom, but the lack of infrastructure and transparency is lamented and criticized frequently. It is obvious that any industry’s success is intrinsically reliant upon the parent country’s interior economic policy and its friendliness to foreign investments. Goldman Sachs Group, Inc. (NYSE:GS) discusses some of the interesting points where companies and countries converge, and complement each other.
The report, titled “Where countries succeed companies follow”, probes into the relationship between the productivity of a country and its policies that encourage innovation. The example discussed in this regard is the US shale oil and gas boom. Had China been bestowed with similar natural assets, lack of entrepreneurship and missing drivers of innovation would have impeded growth in this sector. The growth stemming from innovation is even more evident, when we see showcase sectors of each country. For instance, technology for the US, autos for Germany, and pharmaceuticals for Switzerland.
The chart below depicts the share of each country, expressed in its top industry winners, and draws it against the country’s total contribution to GDP. The information reveals that Brazil and Taiwan are competing well, but Japan, China, and India need to cover a lot of ground.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
The link between successful countries and high quality companies is evident from the strength of Nordic industry, where the notable players are Assa-Alboy AB (STO:ASSA-B), Outotec Oyj (HEL:OTE1V), Metso Oyj (PINK:MXCYY), Atlas Copco AB (STO:ATCO-B), and KONE. In case of Germany’s automotive sector, the dominance of Bayerische Motoren Werke AG (ETR:BMW), Volkswagen AG (PINK:VLKPY), and Daimler (ETR: DAI) shows the country’s innovation. Australia and UK conquer the mining space with names like Newcrest Mining Limited (ASX:NCM), BHP Billiton Limited (NYSE:BHP) (ASX:BHP), Rio Tinto plc (NYSE:RIO) (ASX:RIO), Antofagasta plc (LON:ANTO), Ferrexpo Plc (LON:FXPO), and Anglo American plc (LON:AAL). India benefits from IT sector, and South Africa scores well, due to telecom sector.
Bankruptcies are referred to as creative destruction by Goldman Sachs Group, Inc. (NYSE:GS). Japan reports far less bankruptcies than are expected of it which is in one way good because the process of creative destruction is slower in the country, but at the same time it also kills forces of innovation. Japan keeps the exit threshold for industries at very high levels to protect its banking system, and this leads to low and volatile returns for industries.
Countries also benefit from their geographic location. So Turkey is seen as a gateway between Europe and Asia, whereas South Africa, Kenya, and Nigeria could play a similar role for Africa. A healthy and economically strong neighbor also helps a country. This is well represented by the example of Mexico and Canada, which gained from proximity to US.
The report talks about democratic efficiency, and how a small administration would have more issues with implementing laws and regulations, and will be further impaired by lack of infrastructure and frequent government changes. As long as emerging markets do not implement and encourage innovation in their infrastructure, they will lag behind players like Nordic countries, US and UK.