I just came across an interview PBS conducted with Mark Mobius (for some weird reason the transcript is not dated but the interview doesn’t sound like being very recent It was conducted in May 2001). So anyway, Mark Mobius has an interesting twist on the Passive Portfolio Investor vs the Strategic Investor/FDI-type investor. He makes out that the international passive portfolio investor is in some ways better than the strategic investor because he is letting the management do their thing and is only providing money while letting them do what is right for the local economy etc as opposed to serving the purpose of the strategic investor. This is also related to the hot-money question so often raised in emerging market economies. Here’s the actual excerpt:
There’s another factor which I think is very important, and I think that is between direct
strategic investors and portfolio investors. We are portfolio investors; we are passive. For the most part we’re passive investors. And in the case of the direct investors—who are the major multinationals who come in, build a plant, and take majority control—we’re quite different, because we are actually empowering the local management. We’re telling them: “Look here’s money; you do with it whatever you will. As long as you make this company prosperous we will be happy, because we are partners with you.” In the case of the strategic investor, they say: “Look, get out of here. We’re taking control. We will run this company, and we will do whatever we want, and if we don’t want local people around we can do so; we can throw the local people out.” So there’s another very important distinction to make, which is the reason why very often we’re in conflict with strategic investors is because their interest may not be aligned with the domestic companies’ interest.
Am I in agreement with him? Not quite. His own thought-process might be that of a long-term partnership but I have little doubt that a lot of the FII flows, especially the ones being seen currently in EM economies is purely liquidity driven seeking high returns instead of the artificially low rates in their home countries. Once the monetary stimulus in the US (and EU) is withdrawn credibly, we will likely see a dramatic drop in prices. The flows that come back after that.. those are the ones that might have the stamp of long-term partnership.
[Given that the interview was 10 years old, its likely Mark Mobius also believes the current flows are unsustainable. So I don't disagree with him as much as I think that there will be nicer investment opportunities as the taps are turned off half-way across the globe]