Unlike poor, defenseless Philippine teenagers, foreign investors have successfully avoided Duterte's Philippines.

Philippine strongman Rodrigo Duterte has elicited international condemnation over his bloody drug war,  whose most visible result are thousands of deaths among poor Filipinos unfortunate enough to live in open areas targeted for anti-drug operations. While primarily a security issue, there are also apparent economic consequences for Duterte's "reign of terror" (as the Catholic Church describes it) being waged on the civilian population as foreign direct investment dries up.

In fact, foreign direct investment [FDI] pledges have fallen for the four consecutive quarters Dutertet has been in power.

Investment pledges made by foreign firms slid 55 percent year-on-year to P18.2 billion in the second quarter, the fourth straight quarter that commitments dropped. In a report Friday, the Philippine Statistics Authority (PSA) said foreign investments approved by seven investment promotion agencies (IPAs) from April to June declined from P40.4 billion in the same three-month period last year.

As of the end of the first six months, IPA-approved foreign investments totaled P41 billion, down 38.4 percent from P66.6 billion a year ago. To recall, foreign investment pledges fell 12.8 percent year-on-year to P22.9 billion in the first quarter. Also, approved foreign investments declined 9.3 percent year-on-year to P125.7 billion in the fourth quarter of last year after commitments dropped by a faster 45 percent to P26.7 billion in the third quarter of 2016. It meant that foreign investors’ pledges decreased in the first four quarters of the Duterte administration.

In brief, what we have here is a political risk issue. Would-be foreign investors fear for their safety in a country where a Korean businessperson has been falsely accused of involvement in the drug trade and killed inside of police headquarters in a kidnap-for-ransom scheme. There's also the problem of possible losses of market access. First, the European Union is evaluating whether to continue preferential trade access to the EU under its Generalized System of Preferences Plus (GSP+). Under GSP+, duty-free rates can be availed if participating countries meet various conventions, of which those concerning human rights are coming under scrutiny:

The Philippines was granted beneficiary country status under the EU-GSP+ in December 2014, allowing the country to export 6,274 eligible products duty-free to the EU market. The alleged cases of extrajudicial killings as part of President Duterte’s drug war, however, has put at risk the country’s GSP+ privileges.

The beneficiary status under the GSP+ necessitates the implementation of the 27 international treaties and conventions on human rights, labor rights, environment and governance. Results of the latest review are expected to come out this year.

Following the EU's lead, others are encouraging fellow democracies to impose economic sanctions on the Philippines to discourage Duterte's violence against his own people. As you would expect, Philippine investment authorities are up in arms:

Trade and Industry Secretary Ramon Lopez on Tuesday hit The New York Times (NYT) for urging the international community, in an editorial, to impose trade sanctions against the Philippines for extrajudicial killings under the Duterte administration's campaign on illegal drugs.

"The editorial by The New York Times last March 24, calling for trade sanctions against the Philippines, is baseless and unfair," Lopez said in a statement. "Any form of trade sanction against the Philippines is uncalled for, unfounded and undeserved," the Trade chief emphasized.

In an editorial, titled "Accountability for Duterte," the American daily urged foreign governments to "hit" President Rodrigo Duterte "where it may hurt the most" – trade – in a bid to hold the Philippine leader accountable over the alleged killings in his "deadly" war on illegal drugs.

It's a cliche to say that businesspersons appreciate the lack of uncertainty, but with Duterte in charge of the Philippines, let's say no one is rushing to make investments in a country that's becoming increasingly isolated due to human rights concerns when there are so many far more predictable places to invest.

2016 was a banner year for Chinese investment in the United States.

Unbeknownst to many amid the China-bashing engaged in by Donald Trump and others is that, actually, investment by China-based companies in the United States hit an all-time high in 2016. As is often the case, rhetoric often does not match up to reality. That is, the Chinese have actually found the US to be a good place to invest that's fairly receptive to PRC money (outside of "national security"-related sectors):

Chinese companies invested a record $45.6bn in the US in 2016 despite a presidential campaign heavy on Beijing bashing. But Donald Trump’s imminent arrival in Washington is among factors making the feat unlikely to be matched this year, according to a new report.

The surge in Chinese foreign direct investment into the US documented by Rhodium Group, a research firm, led the annual flow of corporate acquisitions to triple over 2015 levels. It also took the stock of China’s long-term investment in physical assets over $100bn for the first time, with Chinese companies now employing more than 100,000 people in the US.

Now, however, the fear is that president as opposed to candidate Trump may put a halt to further PRC investment in the United States:

That pattern has led to an imbalance. In a November study backed by the National Committee on US-China Relations and the China General Chamber of Commerce, Rhodium said US companies had invested $228bn in China since 2000. In its latest report the group said cumulative Chinese investment in the US over the same period had reached $109bn, with almost half of that coming last year alone.

The rapid increase in 2016 came despite rising political scrutiny of Chinese investment in Washington and a presidential campaign in which Mr Trump, the eventual winner, threatened a trade war with China and blamed Beijing for the loss of industrial jobs in key US states.

What's the basis for the Trump fear? He supposedly has a bevy of China-bashing advisers and prospective appointees for government posts:

But Rhodium’s analysts said the new uncertainty surrounding Mr Trump’s administration and particularly his appointment of China hawks to oversee trade policy meant Chinese companies were unlikely to repeat that level of investment in 2017.

Chinese companies are waiting for regulatory approval for acquisitions worth $21bn and have committed more than $7bn to announced greenfield projects that have not yet started construction, according to Rhodium.

As for me, I do not believe that Trump would discourage Chinese investment. I expect the opposite, in fact. To begin with, his rhetorical concern--economically insensible as it may be--revolves around US companies taking their operations and hence jobs with them abroad. What if foreign companies instead set up shop in America and hired American workers? In the past, especially during the 80s when Trump became a public figure, he's been no less critical of Japan as he is now of China. Remember though that he's now touting Softbank founder Misayoshi Son's promises to increase US-based jobs at its Sprint subsidiary:

Speaking to reporters at his Mar-a-Lago resort in Florida, Trump said telecom giant Sprint, which is owned by Tokyo-based Softbank, would take 5,000 jobs from other countries and move them to the United States. But Sprint said the effort is more complex, and nearly all of its roughly 30,000 employees already work here.

What's the difference if Chinese instead of Japanese firms want to "bring" jobs to America for Trump? I think he'd welcome those equally. There is no reason to bash Chinese firms simply for being Chinese if the objective is job creation Stateside in Trump's logic. It may be convoluted and economically suspect (Sprint is a money loser for its parent company), but hey, that's how his reasoning would pan out with regard to Chinese FDI.

We'll see; it won't be much longer now. Also see the rest of the Rhodium report which has more interesting tidbits.

Damage control surpasses the realm of art into science when the person whose offensiveness you're trying to contain is the Philippine President Rodrigo "Digong" Duterte. Despite the woeful history of a zero tolerance approach to narcotics worldwide--nowhere has the "war on drugs" worked as intended--Duterte is intent on learning this the hard way. Being very think-skinned, Duterte takes any perceived slight very badly, hurling insults at any and all critics.

As it so happens, those who have raised concern about human rights abuses as the body count piles up via extrajudicial killings in his "war on drugs" represent the world's most powerful countries.
President Barack Obama refused to meet Duterte at an ASEAN gathering in Laos after being cursed as a "son of a whore" over possibly raising the issue of human rights. More recently, Duterte threw the  middle finger at the European Parliament over mentioning similar human rights concerns, adding an f-bomb to get his point across.

While the shallow and stupid are doubtlessly happy about Duterte sticking it to leaders of wealthy countries--screw the imperialists and so on and so forth--the sensible are left holding the bag in mending relations with increasingly antsy international counterparts. Consider that, for every single day in September so far, foreign investors have reduced their holdings of Philippine equities. This turn of events has prompted Philippine central bank officials to come out en masse to downplay Duterte's offensive outbursts. These include eight-time [!] best central banker in the world awardee Amando Tetangco:

Philippine central bank Governor Amando Tetangco sought to soothe investors spooked by President Rodrigo Duterte’s rhetoric around his anti-drug war, with stocks poised for the longest outflow since 2007.

“If you take out the noise and look at the fundamentals, look at the economic program, look at the quality of the members appointed to the economic team, then these are all solid,” Tetangco told bankers, traders and fund managers late Thursday in Manila.

Tetangco joins a host of economic officials including Finance Secretary Carlos Dominguez, who on Wednesday said economic policies have been clear and consistent since Duterte took office in June. S&P Global Ratings this week warned of “rising uncertainties surrounding the stability, predictability, and accountability” under the new government.

Meanwhile, money is leaving the country continuously:

Money that flowed into the Philippines after the May elections is drying up. Philippine stocks slid 0.7 percent on Friday, and foreign funds have been selling for 21 straight days as of Thursday, the longest outflow since 2007.

The peso slumped to an eight-month low against the U.S. dollar and is the worst-performing Asian currency after the yuan this year. Foreign direct investment shrank 41 percent in June from a year earlier.

The irony remains that, if you make the reasonable assumption that this "war on drugs" will be as futile as every other, he will have given his country significant political and economic handicaps besides by acting this way. Who benefits?

Whither Iran? With few large developing country markets remaining untapped, Iran's large population and energy-rich economy certainly hold attractions for multinationals. The last one of note, of course, was Myanmar. As multinationals ponder whether to enter this potential growth market, however, risks abound. The Economist Intelligence Unit (EIU) recently put out a report on the opportunities and hazards of investing in Iran. As you can see from the table above, political-economic governance remains a strong concern, yet this observation is almost expected.

Let us begin with situation of Iran opening up which should be generally familiar:

2 January 16th 2016 will forever be viewed as a watershed for Iran. On that day, the International Atomic Energy Agency (IAEA) judged that Iran was fully compliant with its internationally agreed nuclear obligations—a ruling that in effect restored the Islamic Republic to the global community of nations and removed a mass of international sanctions that had been piled on the country since 2006. Keen to make up for lost time, Iran’s president, Hassan Rowhani, has been urgently seeking to drum up new business. On January 23rd he hosted a summit for China’s president, Xi Jinping, in Tehran, at which the two sides agreed to boost bilateral trade to US$600bn within a decade. This was swiftly followed by a trip to Italy and France, where some €50bn (US$55bn) in contracts were signed.

That said, there are still plentiful caveats here. This momentary thawing of relations is always provisional, with leadership changes and their associated geopolitical manifestations remaining in a state of flux. Entrenched economic interests are also unlikely to easily relent on the rents they have accumulated during the sanctions era:

However, even with Iran’s doors thrown open, it would be wise for businesses to keep in mind the ancient Persian proverb: “He who wants a rose must respect the thorn”. Iran’s economy is unusual among the region’s oil exporters; it boasts the largest natural gas reserves in the world and the fourth-biggest oil reserves, and yet it has a diversified economy (including a significant manufacturing sector), all backed up by a large, youthful, well-educated and welcoming population. But the business climate is less welcoming. Vested interests still permeate almost every aspect of the economy, typically operate outside the parameters of international commercial law—especially those businesses connected to the Islamic Revolutionary Guards Corps—and will jealously guard the gains they accrued during a decade of sanctions. And the finger of blame for Iran’s tricky operating environment should not be pointed solely at Iran; an array of residual US sanctions can snare the more unwitting investor, and Iran’s economic momentum is still too dependent on the vagaries of the global oil market.

Still, it's the same story for MNCs with these "frontier" markets: no guts, no glory. The interesting thing with Iran is that it's hedged its FDI bets by approaching China. Which, of course, could care much less than Western nations about governance...as long as there's money to be made.

Starbucks still bets its future on China--and so do many other MNCs, so what gives?

There is a tendency nowadays to sell everything China-related: companies in the PRC, companies that export a lot to the PRC, countries headquartered near the PRC (read: the Asia-Pacific) and so on and so forth. Call it financial guilt by association--if it has even a whiff of China, sell it. So, it must come as a surprise that, actually, there are Western multinational corporations that are not only bullish on China, but plan to expand their operations greatly there in the very near future. That they represent a range of industries is also suggestive of something.

First we have the Swiss banking giants UBS:

Sergio Ermotti, CEO UBS Group, said on Monday that the company will increase its workforce in China over the next five years. In an interview with Bloomberg, Mr. Ermotti said UBS will double its headcount by adding 600 employees to its offices in China. He revealed that these additions would be made across fixed income and asset management, equities, investment banking, and wealth management divisions. He further added that some workforce expansion will also take place in back-office operations as well.

The CEO believes it is the right time to expand in China, as volatility has given rise to growth opportunities. In his statement to Bloomberg TV, Mr. Ermotti said: “Those are also the good times to plan for the future, and that’s the reason why we are starting to implement our strategic plan.”

The coffee empire Starbucks' largest growth market remains...wait for it...China. In 2016, it's still full speed ahead for them in the PRC:

Starbucks Corp. plans to accelerate its expansion in China, shrugging off concerns about a slowdown in the coffee chain’s second-largest market behind the U.S. and a potential further depreciation of the yuan. The company plans to add about 500 new stores in the year ending Sept. 27, up from 450 new outlets in the previous year. China is Starbucks’ fastest-growing market, and the coffee chain is looking to have 3,400 locations there by 2019, compared with about 2,000 now.

“We have no intention of slowing down and we remain very optimistic and bullish on the opportunities that Starbucks has in China, both in the short term as well as in the long term,” John Culver, Starbucks president of the China and Asia-Pacific region, said in a phone interview Tuesday. Starbucks joins SAP SE, the world’s biggest maker of business-management software, in expressing optimism about China, betting on a sales boost as consumption and corporate spending grows even as a decline in the yuan would erode the value of profits they generate in the country.

Are they crazy? Isn't China about to collapse like a house of cards? My inclination is to believe this: China is no longer a "frontier" market where MNCs thought you could gain an tidy profit by getting there first. Rather, it has matured to such a point where MNCs competing with other MNCs and even local firms means that a shakeout of foreign investors is long overdue. Just like in any other endeavor, there will be those who succeed and others who fail. By adapting to local market conditions and building a good name in China, UBS and Starbucks among others aim to consolidate their gains there as others leave.

It's simple as that. As I mentioned at the top of the post, indiscriminately selling anything remotely China-related is not likely to pay off. Instead, pick those names that actually have done well in China and will likely continue to do so. Yes, be discriminating since it's hardly believable that everything there has turned sour all at once. There are still opportunities, but you have to be selective since China is maturing more quickly than you think, whether it be in coffee houses or financial services.

The way we were: Orascom's Naguib Sawiris [c] with the late Kim Jong-il [r].

A corollary to "fortune favors the brave" is "misfortune favors the foolhardy."

Yes, there are cell phones in North Korea--it's just that you cannot call abroad or access the Internet through them. I had been peripherally aware of Orascom, the Egyptian telecommunications provider, through its advertisements on CNN. I was reminded of it in a powerful way when I read a recent Wall Street Journal article discussing how Orascom got expropriated (excommunicated?) by North Korea. Of course, my initial reaction was "Why of course! What were you thinking would happen to you went to North Korea, of all places?"

A closer reading reveals greater subtlety to it than that. Aside from investing in its home region of the Middle East, Orascom has found a profitable niche operating cellular phone networks where others won't dare go. Read: countries high in "political risk," which often isn't actually as forbidding as most of us would presume if you ask Orascom:

Egyptian tycoon Naguib Sawiris made billions of dollars from a global telecommunications empire that operated in authoritarian states from Zimbabwe to Pakistan. Now he is being dealt a potentially painful setback by one of the global economy’s biggest pariahs: North Korea...But in the last few years, a state-run competitor emerged in North Korea, and Cairo-based Orascom hit problems trying to repatriate profits. Orascom said in a November filing in Egypt it had lost control of its 75%-owned North Korean venture, Koryolink, and struck the venture from its balance sheet, removing hundreds of millions of dollars in assets.

Since 1997, Orascom has built and run mobile networks in more than 20 countries across Africa, the Middle East and the Indian subcontinent. Its strategy: Load up on debt to build networks quickly in risky markets with little or no infrastructure, betting on rapid growth and strong returns, then sell when the market matures and more players materialize...

Orascom operated in many politically unstable nations such as Yemen and Bangladesh. In most cases, the gamble paid off. In 2003, Orascom paid $5 million for one of Iraq’s first mobile network licenses. Its local partner faced kidnappings of staff and attacks on property from insurgents, but in 2007 Orascom sold its Iraq operations for $1.2 billion to a Kuwaiti company.

There have been some setbacks. Orascom’s joint venture in Syria with a company run by a cousin of President Bashar al-Assad fell apart in 2002 when a Syrian court handed the Egyptian company’s share of the venture to the local partner.

Zimbabwe, Pakistan, Syria, North Korea...if nothing else, Naguib Sawiris does not lack for courage. His approach is that while there may be a few write-offs here and there like North Korea (and Russia as mentioned elsewhere in the article), that other countries aren't so much in a hurry to chase Orascom away probably holds true insofar as few others would take his place. In Orascom's case, its inability to repatriate profits has led it to write off its North Korean operations:

Orascom’s operations in North Korea began when the country awarded Koryolink the rights to operate its only mobile network from late 2008 through the end of 2012. North Korea had scrapped an earlier project in the country with a Thai firm in 2004, because of fears the network was vulnerable to spies...

Orascom’s problems in North Korea appear to have built during the final year of its exclusivity clause in 2012. Koryolink’s annual report for the year noted “restrictions on cash transfers from local currency” in explaining a $272 million cash balance held inside the country, that more than doubled to June 30.

The company’s board meeting to ratify first quarter results in 2015 was postponed by over a month “due to the delay of the negotiations with the North Korean side to solve the problems arising out of the transfer of dividends, the currency exchange rates and the operational problems that has recently emerged,” minutes from the meeting reviewed by the Journal said.

So now we know that North Korea is really less safe the Pakistan or even Zimbabwe. Whereas countries like those are still peripherally attached to the international community--and even publicly welcome foreign direct investment--North Korea has next to no regard for FDI. As for Orascom, it's probably not crying too much about lost business. When you are in the business of investing in highest-risk markets, well, things like these are bound to occur once in a while.

Besides, I am sure it's made more than a reasonable amount elsewhere.

PS: Also see al Jazeera on "foreign indirect investment" in North Korea.

Does it come with PRC minders listening in as a standard feature, NSA style?

Call it Reds Under the Beds, Cyber Edition. The supposed land of free trade has customarily thrown significant roadblocks in the way of Chinese firms signaling their intent to purchase US tech-related firms on "national security" grounds. The reasoning usually goes like this: Chinese firms trace part of their ownership to the PRC itself, hence there is a threat that their political overlords will ask them to incorporate spying apparatus in the electronics they sell Stateside. It's a lot of "could bes" and "what ifs" when, in reality, we know that the Yankees are no slouches on surreptitiously gathering information on everyone else. There are no hypotheticals there since US spying happens all the time on friend and foe alike.

At any rate, Lenovo--which famously purchased IBM's personal computer business sometime ago--is now looking to buy Big Blue's server business. What's more, it is also looking to purchase Google's Motorola (remember them?) cell phone unit. IBM is looking to concentrate on services. By divesting the server business it will have a negligible interest in selling the "International Business Machines" it stands for. Meanwhile, Google has not exactly revived the moribund Motorola name to compete with the likes of Apple and Samsung. So, on the shopping block both go.

Following earlier,  harrowing experiences of fellow Chinese companies Huawei and ZTE dealing with the multi-agency Committee on Foreign Investment in the US (CFIUS) that looks into foreign investment with "national security" implications, Lenovo is hiring high-priced talent to avoid such entrapment for both prospective deals.

Lenovo Group Ltd. has turned to national security insiders to win U.S. approval to buy Google Inc.’s Motorola Mobility phone unit and International Business Machines Corp.’s low-end server business, people familiar with the two deals said. 

The world’s largest personal-computer maker hired attorneys at Steptoe & Johnson LLP who held positions at the Central Intelligence Agency and the Homeland Security Department to guide its Motorola review through a key interagency panel, one of the people said. Covington & Burling LLP partners David Fagan and Mark Plotkin are representing Lenovo in the IBM server deal, according to another person familiar with the matter...

Steptoe will guide the Motorola review through the Committee on Foreign Investment in the U.S., or CFIUS, one of the people said. Partners Stewart Baker, a former senior official at Homeland Security, and Stephen Heifetz, who served in the Justice Department, Homeland Security and the CIA, are advising China’s Lenovo on its purchase of Motorola Mobility.

Covington’s Plotkin represented IBM in the $1.25 billion sale of its personal-computer division to Lenovo. He leads the firm’s national security and defense industry group, according to his biography on the law firm’s website.

In other words, Lenovo has added to the payroll those who would likely have been on the CFIUS at an earlier time to see its acquisitions push through. Lenovo has the advantage of having gone through the CFIUS process before. What's more, the businesses it intends to buy are supposedly not "mission critical" in undergirding the US telecoms infrastructure:

Lenovo’s purchase of IBM’s PC business has already been vetted by U.S. officials, and the company was cooperative and open during that investigation, Lewis said. In addition, they’re buying low-end, consumer-oriented businesses.

“If you had to pick a Chinese company that wasn’t going to run into trouble, it would be them,” Lewis said. “This is a pretty vanilla deal, as opposed to the backbone telecom products, which have always been considered a strategic industry. No one considers servers or handsets strategic.” 

I do hope so, but I somehow think that US lawmakers will make a big stink of both either way to score political points. Remember, too, that Lenovo tried to purchase Canada's BlackBerry late last year--a seemingly innocuous purchase along the same lines as Motorola--but was thwarted by the Canadian government:

Beijing-based computer manufacturer Lenovo Group Ltd. actively considered a bid for BlackBerry Ltd., but the Canadian government told the smartphone company it would not accept a Chinese takeover because of national security concerns, according to sources familiar with the situation.

Ottawa made it clear in high-level discussions with BlackBerry that it would not approve a Chinese company buying a company deeply tied into Canada’s telecom infrastructure, sources said. The government made its position known over the last one to two months. Because Ottawa made it clear such a transaction would not fly, it never formally received a proposal from BlackBerry that envisioned Lenovo acquiring a stake, sources said.

No matter how hypocritical or far-fetched, racist-protectionism persists among North Americans.

Much has been made of the protectionism which firms such as those from China have encountered investing in the West. I have called specious arguments on "national security" grounds unvarnished racism, and such discrimination certainly plays a part. Moreover, I have been further vindicated by leaks that reveal massive American spying on its own citizens and those of the rest of world. Who's the real "national security" threat here when one of the largest US tech firms labels its government as an "advanced persistent threat"? You are, quite frankly, a bleeping moron to believe in US security guarantees, especially when it comes to online activity. Internet freedom is effectively unlimited America freedom to spy on you.

However, developing countries' efforts to invest elsewhere is largely driving the ongoing controversy. That is, there would be nobody to discriminate against if their firms stayed home. Accordingly, there's interesting stuff in the current issue of Global Finance about the ever-rising amount of FDI originating from poor countries. Otherwise put, these are countries that in the not-so-distant past would have been mere recipients of FDI:

By far the biggest FDI story of the past few years is the rise of developing and transitioning countries as a source of outward FDI, which jumped from $65 billion in 2003 to $481 billion in 2012. Naturally, China is in a league of its own. In 2012 it came in third among the world’s top 20 investor-economies, behind only the US and Japan. Beyond the acquisitions it has been making across OECD countries, China is aggressively developing natural resources and infrastructure from Africa to the Middle East.

For example, in 2013, PetroChina bought a 25% stake in the Iraqi oilfield of West Qurna 1, right around the time construction of the new Mombasa-Nairobi railway line began in Kenya, financed by the Export-Import Bank of China to the tune of $4 billion. But the new FDI landscape does not include just China. FDI originating from emerging markets is multiplying around the world. In 2013 a Chilean bank took over an American one, a Thai energy company made its first investment in Australia, and the largest Coca Cola bottling company in Mexico acquired a competitor in Brazil.

Notably, however, Global South investors do not invest in the same way their Global North counterparts--traditional TNCs--do:

Importantly, developing and transitioning country investors display characteristics that set them apart from traditional developed-world multinationals.

For one, state-owned enterprises and sovereign wealth funds generate the lion’s share of outward investment. This raises concerns about fair competition. “SOEs may have access to lower-interest loans and better financing conditions [than non-SOE competitors],” says Masataka Fujita, who heads the investment trends section in the division of investment and enterprise at Unctad. “SWFs even have a large amount of assets under management, and, like in the case of SOEs, their governance structure is not always transparent.” Their operations are also viewed with suspicion by host economies because a foreign government is behind them.

In addition, emerging markets companies seem to prefer mergers & acquisitions over greenfield investment as a mode of entry, especially when it comes to FDI into developed countries. “They look to OECD countries because these remain the world’s largest markets and because they are interested in the technology found here,” says José Guimón de Ros, associate professor of economics at the Universidad Autonóma de Madrid in Spain. “Since the crisis, many developed-country companies are under stress and therefore cheaper, so now is a good time to buy them.” Partially as a result of this phenomenon, cross-border M&A has held steady in 2013, stabilizing global FDI flows even as investment in new productive assets has declined.

Finally, emerging markets companies are inherently more familiar than their OECD counterparts with how to do business in a developing-country setting. In part as a result, the majority of investment from emerging markets is going to other emerging markets. According to Unctad, in 2011, China exported 70%, and Brazil 40%, of its outward FDI stock to neighboring emerging economies. “Regulations in developing countries are less complicated,” says Du The Huynh, senior lecturer at the Fulbright Economics Teaching Program in Ho Chi Minh City, Vietnam. “The competition is also less fierce.”

The telecom sector illustrates this well. Vietnam’s largest mobile-network operator, Viettel, has successfully established itself in Mozambique, Haiti, Laos and Cambodia, countries that by most OECD investors’ standards are difficult places to do business.

True, the Western media headlines are dominated by South-North FDI. real Yet it's not mostly the formerly colonized investing in the heartlands of the erstwhile colonizers, but poor countries venturing where rich countries dare not--scared off by corruption and other bogeymen for white people. Yes, South-South investment is happening:
to paraphrase Aretha Franklin, Queen of Soul, poor countries are doin' it for themselves.

There was another large controversy about Chinese firms operating Stateside three years ago when the PRC-based credit rating agency (privately-owned, mind you) Dagong was denied by the SEC from being granted Nationally Recognized Statistical Rating Organization (NRSRO) status. As IPE Zone readers know by now, NRSRO status is important insofar as gaining this recognition allows a credit rating agency to legitimately evaluate what is still the most liquid capital market of them all for dollar-denominated debt. Then, the SEC claimed that Dagong could not comply with the Feds' standards for tranparency if so required:

[W]e find that we must deny Dagong's application because, irrespective of the jurisdictional question, it does not appear possible at this time for Dagong to comply with the recordkeeping, production, and examination requirements of the federal securities laws.

The "jurisdictional question" concerns the Chinese SEC equivalent the China Securities Rating Commission (CSRC) having its own set of rules concerning access to such documents. At any rate, Dagong was partly culpable in not properly explaining how it would handle SEC requests for information about ratings in terms understandable to Westerner bureaucrats. Dagong even threatened to sue, but nothing came of it:

Chinese rating agency Dagong Global Credit Rating Co. called the Securities and Exchange Commission's recent denial of its application as an officially recognized bond rater in the U.S. discriminatory and said it considers taking legal action against the agency.

In a strongly worded statement posted on the company's website Sunday, Dagong said SEC's sole reason for denying its application is the commission can not conduct cross-border supervision over the Chinese firm.

At any rate, Dagong has not given up on its quest to become a global player in the ratings game. Aside from the publicity stunt of downgrading US debt from AAA status before S&P, it now has done what few PRC ratings firms are willing to do in downgrading local issuances regardless of the argument that the government always stands ready to bail out SOEs which constitute a large part of the Chinese economy:

At the end of June, Dagong Global Credit Rating Co. broke ranks with its local competitors and downgraded three bonds issued by infrastructure-construction companies wholly owned by Chinese cities. It said it was losing faith in the governments' backing of the bonds [...] The three bonds Dagong downgraded—for the infrastructure-construction arms of local governments in Jilin, Jiangxi and Hubei provinces—had their ratings lowered by only one notch and still are rated investment grade.

Another strategy aside from establishing an image of political independence at home is using Europe instead of the US as Dagong's Western beachhead:

Dagong's go-it-alone stance is a measure of its ambitions. Chairman Guan Jianzhong—a trained accountant who took over in 1998 and owns a chunk of the 20-year-old private firm, according to a person familiar with the company—has spoken bullishly about the need to break the lock-hold Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings have on global debt ratings. Dagong hopes investors would be open to a new ratings firm after the global financial crisis resulted in a major loss of faith in the established players.

European regulators have taken note. In June, before the downgrades, six European Union regulators approved the registration of Dagong's Milan-based unit, allowing it to rate companies in Europe. Dagong previously had been turned down by the U.S. Securities and Exchange Commission in 2010 after it applied to do the same in the U.S.

The best way to combat Western discrimination is to tell it like it is when handing out ratings, since being proven right by subsequent bond issuer performance is the best way to gain others' confidence. Besides, who exactly is going to argue that Western ratings firms are any good in this day and age? As bond issuances increase from China in particular and East Asia in general, the clout of Asian ratings firms should increase accordingly.

The lame 2010 NRSRO application aside which appeared to fail due to unpreparedness as much as discrimination, it's only a matter of time.

Mas oui! There's an old joke that the best car made in America is the (Ohio-made) Honda Accord. Similarly, we may soon hear that the best jetliner made in America is the (Alabama-made) Airbus A320. Following the lead of Mercedes-Benz, the multinational European concern has decided to set up shop in the land of the Crimson Tide to meet US demand for its bread-and-butter Boeing 737 competitor. The post below talks about how the Chinese have been continually frozen out of investing in the US over increasingly dubious "national security" grounds. Yes, there remains that brouhaha over it being forced out of a contract to make the US Air Force's next generation air tankers, but that was not really over "national security" but over "buy American" objections. The Europeans being Europeans, there are no such concerns with Airbus investment in the commercial sector despite its long-running WTO dispute with Boeing. Speaking of whom, unfavourable attention regarding the 787 Dreamliner's design faults may, by default, work in the European consortium's favour insofar as there are only two real players in this industry at present.

There is now an MSN contribution from Allan McArtor, chairman of Airbus Americas, about the consortium's selection of Mobile, Alabama as the site of forthcoming A320 manufacture after originally selecting it to build the shelved tankers:

It's the same with our relationships with the people of Alabama. When our team first started looking for an industrial base to manufacture a refueling tanker for the U.S. Air Force, hundreds of cities stepped forward. After an exhaustive evaluation process, Mobile emerged as the obvious choice.

Sure, it met our technical requirements. But so did others. A differentiator for Alabama was the unity and supportive purpose shown by every entity in the state supporting Mobile. City, state and federal representatives (Republicans and Democrats alike) came together with one goal: Show the Airbus team that Alabama would be its partner for the long term.

They spoke with one voice, which impressed our selection committees. And when the U.S. tanker project was lost, instead of hanging their heads and walking away, they said, "What else could we do?" It was indicative of the good relationship Airbus has with Mobile and Alabama—instead of giving up, we found another way to make it work. As a result, Alabama got an even better, larger-impact project.

Infrastructure was another key factor: The site was perfect, with an airport and ocean port, and adequate land at Brookley Aeroplex. Workforce was also vital. We were encouraged by the auto industry's success in Alabama because its manufacturing aspect is a trained skill similar to that of aircraft assembly. 

All's well and good, but an unspoken reason here regarding human capital is that foreign investors prefer investing in the American South--the Sun Belt--is because of its largely non-unionized workforce compared to the Rust Belt. I was struck how Alabama's officialdom explicitly mentions this selling point that Mercedes-Benz there has little use for unions:

Alabama's Mercedes-Benz plant, the subject of an active organizing campaign by the United Auto Workers, doesn't need a union, Gov. Robert Bentley said. The governor was at the Tuscaloosa County plant last week to participate in a sendoff for its president and chief executive, Markus Schaefer, who is taking an executive role at the automaker's headquarters in Stuttgart, Germany.
After the event, Bentley said the plant is a close-knit organization that works well together as a team."I really don't believe they have any need for unionization and an intermediary between them and management," he said in an interview in response to a reporter's question about the UAW campaign. "I don't think it's going to happen."

The governor added that Alabama's status as a right-to-work state helps him recruit new business. Bentley's comments are the most pointed public ones to date from a state official about the UAW's latest campaign at the Mercedes plant, which launched Alabama's auto industry in the 1990s. Previous organizing attempts there have failed.

Having escaped the clutches of European unions, you'd hardly think they'd be enthusiastic about setting up shop in America only to find that it too is thick with them. Hence the continuing popularity of Southern right-to-work states; keep the unionized whingers in the Midwest (and Western Europe too for that matter).

I am a true connoisseur of all sorts of protectionism: the more obscure and inscrutable the justifications for it, the more I savour the hypocrisy. Free trade? Get outta here! In recent years, the United States has served up some of the more ridiculous examples of what is, at heart, unvarnished racism on the part of American lawmakers. (You don't see them block European foreign investment on a regular basis, do you?) When the purchase of minor American producer Unocal by Chinese SOE CNOOC, "national security" concerns were raised. There was also the matter of 3Leaf, a minor player in the server market, being subject to Committee on Foreign Investment in the US (CFIUS) harassment over interest from Huawei. Nevermind that 3Leaf was a marginal player in the server market in the same way UNOCAL was in energy, but rampant and rather irrational fears of Chinese snooping on US data were in play. After the Snowden incident, Xinhua correctly described the utter hypocrisy behind American data security concerns with the US being "the biggest villain of our age" in cyber-snooping activities.
 More recently, we have had the latest twist on American "national security" concerns regarding the Chinese. It doesn't really matter that the suitor in question isn't an SOE; I guess Yanks believe once you've seen one of them you've seen them all. I am thus wryly amused by this latest form of "hog farm protectionism" as China's Shuanghui International attempts to purchase America's Smithfield International.

A Senate committee on Wednesday criticized a major merger of U.S. and Chinese agricultural interests, saying the combination of two major pork producers could have negative impacts on U.S. food and economic security.

The hearing before the Senate Committee on Agriculture, Nutrition & Forestry was exploring the impact of a proposed merger between Smithfield Foods, the leading pork producer in the U.S., and Shuanghui, China’s largest pork producer.

The $7.1 billion acquisition is the largest purchase of a U.S. company by Chinese business interests. The merger sparked skepticism from committee members who were concerned about Smithfield’s ability to maintain compliance with food-safety standards expected in the U.S.

Read more here: http://www.mcclatchydc.com/2013/07/10/196351/senate-committee-wary-of-us-china.html#.UeFeNKxjuSo#storylink=cpy

A former US trade official, Robert Herztein, added fuel to the fire by tortuously describing this "hog farm protectionism" in terms of the Chinese unleashing tainted food products on an unaware American public:

It could, of course, be a stretch to conclude that Chinese ownership of Smithfield, the world’s largest pork producer, might impair U.S. national security...Reports of egregious food adulteration in China suggest a culture where companies have little concern for safety and health standards.

While there has been an episode of a supplier providing tainted meat to Shuanghui, it has since increased its monitoring of its supply chain. (I invite Shuanghui's critics to find the smoking gun that indicates Shuanghui promoted the use of chemicals hazardous to human health instead of implying this to be the case. Moreover, Herzstein conveniently ignores that Smithfield has been scaling back use of the controversial drug ractopamine in order to meet Chinese demands to be free of this feed additive. In the last year, Smithfield has lessened ractopamine usage in half--presumably in expectation of a China deal: 

This March, China began requiring third-party verification that U.S. pork products were ractopamine-free. Russia, the sixth-largest buyer of U.S. pork, had blocked imports of U.S. meat using ractopamine weeks before...The measures highlighted a sharp contrast with the U.S. Food and Drug Administration, which approved ractopamine for use in commercially-raised swine in 1999 and stands by that decision, saying its safety has been corroborated four times. It is used in more than half of the U.S. hog herd, analysts estimate.

By early May [2013], Smithfield already had moved two of its plants - including Tar Heel, North Carolina, the world's largest pork-processing facility - off ractopamine. When the third plant converts on June 1, "over 50 percent of our operations will have no ractopamine as part of their feed rations," CEO Pope said.

Shuanghui also has its own rather self-serving FAQ, but nevermind: I am honestly at a loss as to why Americans always ascribe the worst to the Chinese. Given such intense scrutiny, how likely would it be that they would (a) divert fuel supplies meant for the US to China, (b) build routers to deliberately spy on American communications or (c) risk a mass poisoning of American pork consumers? It makes no sense. Not only would they lock out other Chinese firms from investing in the US for years and years, but the ferocious backlash would ensure that their days of doing business Stateside are numbered. Forced divestiture or a massive public boycott; the result would be the same.

As a more pragmatic, less ideological sort, here's my suggestion to the Yanks: Why don't you let the Chinese invest and see what happens instead of pigging out on racist protectionism all the time? I truly doubt that egregious violations of public safety on a massive scale would occur, Snowden-style. For aforementioned reasons, getting rid of "national security" transgressors would be so very easy and set an example besides.