The Emerging Markets Century: How a New Breed of World-Class Companies Is Overtaking the World

The Emergence of Emerging Markets

"There are no markets outside the United States!"

The year was 1974. I was a young banker, still wet behind the ears, working at Bankers Trust Company in New York. I had been asked to conduct a study on recycling petrodollars. Helping governments overseas to invest on a truly global basis seemed like a logical concept. But when I interviewed the bank's trust department (at the time among the largest in the United States), an intimidating executive tugged on his red suspenders and wrathfully snarled: "There are no markets outside the United States.

The man had at least two decades of experience in the banking industry on me. My own perspective was, for better or worse, different. I had grown up in Holland and had owned a few shares of Philips, Shell, and Unilever as a boy. Little did my interlocutor at Bankers Trust (nor I, for that matter) know that the great inviolable institution we worked for would one day be taken over by Deutsche Bank -- a global rival from one of these "nonmarkets."

Experiences like this made me skeptical of conventional wisdom. They taught me to rigorously scrutinize faulty assumptions that even the experts -- in some cases, particularly experts -- all too frequently make as a matter of course. Ever since taking a course in development economics at the Netherlands School of Economics from Professor Jan Tinbergen (a brilliant econometrician who later became the first Nobel Laureate in economics) I had been fascinated with the fate and fortunes of what was then known disparagingly as "The Third World." Later, as a graduate student in Russian and East European studies at Yale in the late 1960s, I realized that central planning and communist ideology had little future, and longed to find out how foreign investment might help or hurt Third World development.

At Bankers Trust, I gained some exposure to a few of the more exotic forms of Third World economic development. I helped Iran Air lease airplanes and hire crews in Ethiopia, was involved in financing Ghana's cocoa exports, and grew wise to the ways -- many of them laughably one-sided -- that developed nations interacted with what were in many cases recent European colonies. Less than a year into my first job at Bankers Trust, I surprised no one more than myself by becoming suddenly, uncharacteristically, and inexplicably bored with analyzing American companies for the bank's credit department. For some reason, the dynamism of the world seemed to lie elsewhere. I managed to convince my open-minded superiors at the bank that it would be useful -- not just to me personally, but also to the bank -- for me to take a trip to Asia to study foreign investment in the region.

My trip turned out to be, as the popular parlance of the time had it, a mind-blowing experience. At the Seoul airport in 1971, the military policeman at immigration cocked his gun when he mistook the sunglasses in my pocket for a weapon. Seoul looked like a city in the Soviet Union, which I had just crossed on the Trans Siberian railroad: shabby, chilly, and poor. No skyscrapers yet loomed over the cramped center city and antiaircraft guns were starkly visible on just about every street corner. Even after a decade of 9 percent growth, Korea's per capita income stood at a dismal $225 (it is now over $10,000) although that was already three times higher than that of India. Still, the executives I met were already dreaming of export markets when they were not conducting their compulsory military training exercises.

That first trip to Asia took me to an exotic continent in which the war in Vietnam was still raging, to a Japan stuck in its first postwar slump, to a China still closed to outsiders like myself, and to an India nervously watching Bangladesh separate itself from Pakistan. Cars that looked like throwbacks to the 1950s were the only ones to be seen on the roads in New Delhi. Yet I could already feel the dynamism of many companies I visited, and their determination to make it big. I heard how companies from Hong Kong and Singapore were beginning to relocate their most labor-intensive operations to their lower-cost Asian neighbors. I intuitively grasped during that youthful Asian sojourn that multinationals would one day be attracted to subcontracting labor-intensive operations to countries with an abundant, cheap labor supply rather than merely assembling components in protected, local mass markets.

Upon my return to New York and Bankers Trust, I went to work for the International Department, an island of like-minded souls, but elsewhere there were few who shared our enthusiasm for the booming business prospects of Asia. This abiding sense of being outside the loop provided an important motivation for my acceptance, several years later, of an offer to move to Thailand to manage a local investment bank, majority-owned by Bankers Trust, which I chose over a rival offer to run the bank's branch in Paris. Bangkok or Paris? After my Asian trip, the choice seemed obvious to me, but one that many of my colleagues at the bank found hard to understand.

I spent the next four years in Bangkok happily learning the ins and outs of foreign markets as the managing director of the premier Thai investment bank. We were instrumental in bringing some of the first shares issues of local companies to the stock market, while riding like a bucking bronco one of the perennial boom-and-bust cycles of the Securities Exchange of Thailand. My turbulent tenure in Bangkok taught me that foreign investors would be better off hedging their bets by investing in a basket of markets in developing nations as opposed to a single one. Equally important, I observed the astonishing rapidity with which local firms absorbed international lessons, from raising chickens or producing textiles to assembling cars, and how they often managed to add their own local innovations to the mix.

In 1979, I left Bangkok for Washington, D.C., to join the International Finance Corporation, the private sector arm of the World Bank. Initially, I was taken aback to learn that the idea of portfolio investment in developing economies was regarded with suspicion, as fundamentally unsound. The knee-jerk reaction of the majority of development experts at the World Bank Group was surprisingly dismissive and resistant to the idea of investing in immature economies. How could these tiny and volatile casinos, my colleagues wondered out loud, possibly exert the slightest impact on real economic growth and development? How could these fledgling economies ever gain traction or attention or sizable investment flows from serious investors? This was my second lesson in how seriously flawed conventional wisdom can be.

Under the leadership of my courageous and decidedly unbureaucratic director and later friend, David Gill, another former investment banker, and with a handful of colleagues we gradually convinced the skeptics at IFC and the World Bank that increasing portfolio investment in developing countries might help entrepreneurs succeed and make companies less dependent on foreign aid and debt. My stay in Thailand had convinced me that a number of interesting new companies in the Third World were simply being ignored by major investors. But as David Gill used to say, correctly, "Finding one single successful example of people making money will be more convincing than a hundred academic papers." That is precisely what we proceeded to do.

Yet even sympathetic listeners tended to raise eyebrows when we brashly proclaimed that, in the near future, foreign portfolio investment would become more important than the World Bank as a source of funds for developing economies. At the time, IFC only invested directly in a strategy that requires an investor to take a major stake in companies and often a seat on the board of...