Global capital flow creates opportunities: from their vantage point, financial executives can move beyond detached analysis of the creative ideas of others and apply their knowledge of capital flows to building innovative strategies of their own.

• Author: Cohan, Peter S.
• Position: FINANCING

Financial executives are at the table when it comes to charting the strategy of a business. But they often tend to limit themselves to analyzing the financial viability of others' suggestions rather than offering innovative strategic approaches of their own. It needn't be so. Their familiarity with capital flows across the globe can help them to identify emerging trends that will shape the value of their enterprises.

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Capital flowing around the world is creating both unexpected business opportunities and threats. Examples of how capital flows spur these events suggest important issues that chief executive officers and chief financial officers should be addressing to seize opportunities and protect against threats.

A new concept--the Entrepreneurial Ecosystem (EE) (see chart on page 54)--helps explain why capital flows to some countries and not to others. EE consists of several factors, ranging from financial markets and corporate governance patterns to human capital resources and intellectual property regimes.

Those unexpected opportunities spring from a mismatch between the prescriptions flowing from an analysis of a country's EE and those of traditional theories with respect to the most fundamental business decisions that financial executives must help make. Here are four examples:

* How to pursue global expansion;

* Which growing industries to invest in;

* How to manage mature businesses; and

* How to hire managers and coordinate global operations.

1. Pursuing Global Expansion

   A traditional approach to globalization often implies that firms enter overseas markets through direct foreign investment--either through greenfield operations or acquisitions. Occasionally, companies pursue joint ventures because of government regulations, but only as an intermediate step on the way to assuming complete control.

   If none of these alternatives are feasible, the company should wait until conditions are ripe to enter the country. But research into the economic pressures created by global capital flows suggests that this is not always the right thing to do.

   For example, Wal-Mart Stores Inc.--which had traditionally expanded into countries such as Germany through acquisition--rethought its India strategy. In response to the risks and opportunities presented by India's evolving retail EE, Wal-Mart chose a value-chain-splitting strategy in which it joined its back-office skills with its partner's retailing ability.

   The Indian government, using an industrial policy approach, has forbidden foreign investment in retailing by foreign companies such as Wal-Mart. This has allowed Indian business groups with access to global capital, such as Reliance Industries Ltd, to get into retail in a big way.

   As Reliance and a few other local players went about the task of creating formidable entry barriers for potential future entrants like Wal-Mart...