This presentation was made by Professor Patrick McNutt and is part of the Global MBA offered by FGV in partnership with Manchester Business School (MBS)

1. Impact of the Internet Ageon the Economics of Business Patrick A. McNutt w ww . P a t r i c k m c n u t t . c o m

2. Outline of Presentation

3. There is a Paradigm Shift in Economics: Greater Role for FDI Old paradigm GDP = C + I + G + (X – M) still used in macro-models Old economy FDI = retained profits New economy FDI = asset-seeking FDI (low cost locations) and efficiency-seeking FDI (information and communications) New paradigm GDP = X + FDI + (G + C)

4. Cross-border FDI capital flows Since 1990: Cross-border capital flows have been rising at an annual rate of 10.7%, adjusted for inflation and exchange rates. From 1980 – 1990 annual rate of 4.3% MENA has witnessed YOY average increase of 95% due to global demand for petrochemical products. Explain the increase Information has created connected markets allowing key suppliers of capital to supply across borders and across currencies: Example: DIFX and world portfolio funds or QSTP 100% foreign ownership or China-Egypt

5. Intra-Regional FDI Flows Top 5 FDI Recipients 2005-2009 UAE, Turkey, Egypt, Saudi Arabia, Morocco FDI Flows to MENA [inc Turkey] 13.4% share of Developing World FDI FDI Stocks as % Real GDP (average adjusted) Middle East [inc Turkey]: 11.9% North Africa: 24.8%

6. Example of ‘Classic’ FDI Targeted Industries Chemicals and chemical products (Bahrain) Telecommunications (Kuwait) Hotels and restaurants (Saudi Arabia) Yarn spinning mills (Turkey) Amusement and recreation (Dubai)

7. Connected markets Connected markets exist because of the Internet: global markets are now locally controlled…..data warehouses, IT processing, international brokerage, supply chain management, technology transfer, information-sharing.

8. What are the consequences? Global growth is increasingly driven by Emerging Market [EM] economies. Key EMs are China, Russia and India Emergent debt is still supported by strong economic fundamentals. More Governance: Example: IAIGC Membership, zero customs duties under Greater Arab Free Trade Area

9. Information and Communication Will Define the Opportunities Information is now a commodity with positive costs. Communication costs are falling. Information processing = risks + mixed signals OPPORTUNITIES Hybrid portfolio of PE and HF focusing on distressed opportunities. Strong global growth has come with falling capital costs and a wider use of quants to reduce credit risk. FDI = investment in transfer of technology, IPRs and technology licensing agreements.

10. Key Drivers of investment opportunities Pressure on EM currencies and exchange rates: EM currencies to continue fluctuation against US$ and Euro. Global outsourcing and local restructuring: Focus on exposure to core products – energy, utilities, materials, equipment suppliers. Real interest rate policy in Key EMs: Negative: Impact on confidence of investors to Central Bank money as store of value. Positive: Appreciating currency. .

11. Real Time Information Flow

12. FDI & New Economy Between 1980-1998, US, EU and Japanese companies signed 9000 strategic technology alliances: New economy companies with costless entry Churning equilibrium: goes beyond traditional FDI of bricks & mortar’ to FDI as ‘information bridge’ in technology and information flows. Information is a tradable resource for the distribution of technology and innovation with FDI potential.

13. Example of New Paradigm: Trade co-operation Increased Intra-nation trade: only 25% of Asian exports go outside Asia. US, EU and Japan share of global economy is falling [60% in 2009] and expected to approximate 50% in 2020. More co-operation and technology transfers: FDI ~ Chinese-Egyptian Business Council 2006 or Singapore-China Trade Mission 2009

14. New Paradigm Recommendations for FDI flows Strategic exposure to Key EMs with currency regime linked to US$ with rising inflation with rising commodity prices exposure to high yield corporate bonds prefer credit over equities prefer equities over government bonds

15. New Geo-political order Emerging markets: young population, technology transfer, creative industries, and FOREX reserves: EMs, GCC, MENA, ASEAN and BRIC More FOREX Non-dollar Assets and the role of US $. EMs’ Equity markets: High P/E due to high GDP growth = Flows of FDI as purchase of shares.

16. Post-Internet Agesince 1988 (arrival of home PC and www URL)‘virtual’ investment

17. FDI and Creative IndustriesEU Benchmark

18. Creative Industries: EXAMPLES Virtual surgery or High-Tech Tourism Smartphone technology or Telcos Prime Brokerage or Portfolio Fund Management

19. New FDI Investment Opportunities Understand the ‘information bridge’ in the Template for FDI Investment Asset-seeking FDI = Case C Efficiency-seeking FDI = Case B Market-seeking FDI = Case A

20. Template: Case A: Virtual surgery

21. Template Case B: Smartphone Technology

22. Template Case C: Prime Brokerage

23. Investment Clinic

24. Investment Cycle

25. Information Processing Data availability in the cloud Virtualisation of both product and process Example: (i) IT infrastructure delivered as a service (ii) Convert data into strategy and insight (iii) 50% increase on average in Business expenditure on information processing equipment and software since 1990s Mismatch in Risk Signals Weightless companies

26. Mismatch in Risk Signals

27. Weightless virtual companies Weightless companies: $x invested in physical assets, $y invested in sales & capitalisation: Yahoo, Microsoft, Apple, Google…………….??? $y >> $x Market Panic Analyst advice: Strong SELL to SELL Consensus: HOLD Panic as Consensus ‘Sell’ and Price Falls Deviation of Equity values from Fundamentals

28. Investment Signals S&P 500: 40% of revenues from foreign sales. 50% of world’s equity capital is now outside the US. Nascent bubble in EMs depends on sustained growth in China: 10% of World GDP. Case I Macro economic trends moving towards intra-nation trade and exchange rates as policy tool. Case I EMs and ASLEEP economies to account for 50% of world trade and 30% of world exports by 2015. Case II production drives demand in oil and core scarce resources. Micro economic trends with technology transformations. Case III vertical handset manufacturers transform to horizontal computer markets. Case IV global in-sourcing with mobile workforce. Case V increased mobile banking and e-purse payment methods.

29. Concluding……..

30. What lies ahead in brokerage: FDI/Macro Trends?

31. What lies ahead in brokerage: FDI/Micro Trends?

32. Private Equity: Prognosis

33. Prognosis for FDI

34. Predict an Information Overload!!

35. THANK YOU ‘’do not wait for the stream to stop before crossing it’’