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Round Table

Cross-border Investments in Emerging Markets: A Valuation Perspective – Discussion Ravi Anshuman

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ignificant amounts of capital are flowing from the developed world to emerging markets. But how do firms in the developed world allocate capital in emerging markets? How do they value

investment opportunities in a cross-border investment in an emerging economy and deal with the various challenges that arise in the process? How do firms adjust for issues such as political risk, foreign exchange risk, and differences in institutional environments across borders? IIMB Management Review invited a panel comprising management practitioners, academics, policy makers and other stakeholders to discuss these issues and challenges. The panel debated a range of issues including the fundamental question of what drives capital flows into emerging markets; the micro perspective of corporate investment policy which included differences in industry practices and valuation techniques in developed and emerging markets, how

Ravi Anshuman is Professor, Finance and Control, Indian Institute of Management Bangalore. anshuman@iimb.ernet.in Prof Ravi Anshuman anchored the Round Table Discussion and is the Guest Editor of the Round Table on Cross-border Investments in Emerging Markets: A Valuation Perspective. IIMB Management Review, March 2007

companies from emerging markets viewed the outside world; how risks are accounted for in the asset pricing models; the role of taxation policies in influencing cross-border investments; how corporate governance is factored in valuation and the part played by organisation structure; how strategic opportunities affect valuation; and finally, how much of an art valuation is.

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The panellists in the Round Table discussion on Cross-border Investments in Emerging Markets: A Valuation Perspective were: Mr Indranil Chowdhury, CFO, Volvo India. indranil.chowdhury@volvo.com Mr V Ganesh, CFO, Trianz. Ganesh.V@trianz.com Mr H Padamchand Khincha, Chartered Accountant, H C Khincha and Co, Bangalore. padamkhincha@vsnl.com Mr K Ramakrishnan, CEO, Spark Capital Advisors (India) Pvt Ltd. ramki@sparkcapital.in Mr T S T Ramanujam, VP, Finance, Serviont Global Solutions Ltd. ramanujamtst@servion.com Mr Amit Sharma, CFO, IBM India. amsharma@in.ibm.com The discussion was anchored by Prof Ravi Anshuman. Prof B Mahadevan, Chief Editor, IMR, was co-chair. Faculty members of IIMB participated in the discussion.

developing economies follow an export oriented growth strategy, with incentives from the respective governments, which leads to above normal gain on investments. According to a 2004 McKinsey Global Survey, a firm’s decision to enter new markets chiefly focuses on the market size and the revenue growth potential. Other key factors that affect the decision to enter a market include the political and economic stability and the structural conditions of the market. The drivers of investment in emerging markets may differ from country to country (Exhibit 1). Our policy is to contrast their different financial/economic underpinnings which allows us to focus on how to invest in these markets. The same strategy would not be applicable across all markets. India has a very transparent listing process with well developed, vibrant local capital markets. In China, growth is driven by public enterprises, as it is primarily a controlled economy. Brazil and Russia display the characters of both to different degrees. The success factor in each of these markets would be different. MNCs often rely on the country risk/competitiveness ratings by the world rating agencies to determine the country risk premium. Once companies decide that a particular investment is worth the risk, they use traditional techniques for risk mitigation, such as — recruiting local partners, limiting R&D in nations with weak IP protection, and insurance against events like appropriation, violence, currency inconvertibility, etc. They may...
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