Monday, July 11, 2011

Strategic Investment - an underutilized social progress tool

While strategic investment is an ambiguous term, I'd like to focus on its sense of investing principally for the products and outputs of an investment as differentiated from focus on the potential financial returns of an investment (called, say, greed investments).  While strategic investment includes ambitions of return of and return on capital, the investment is motivated by indirect benefits.

Government investment virtually always has pretexts of being strategic.  Infrastructure, welfare, job creation, industry and export subsidies are all done on pretexts of strategic social benefits, and not for the returns.  Private investment can be strategic as well if the indirect benefits are important.  Walmart could invest in Chinese transportation companies and shipbuilders for the purpose of enabling cheaper and faster imports.  Consumer electronics compani(es) could support materials or physics research without (theoretically) monopolizing the success of the research.  A specialty restaurant could support a local food producer for its ability to provide it quality or cost advantages. A remote town could assist a doctor or retailer to locate there.

Energy capacity is a common strategic and geopolitical issue.  Greed interests can easily convince national policies to ensure the control of resources, but while there is a strategic social benefit of increasing energy capacity and exploitation, giving control of foreign oil resources to say US-based Chevron, provides no assurance of US-favourable oil pricing or supply availability.  The social costs and attrocities of war make strategic resource acquisition and development (through war) net socially-destructive.  Beyond the moral argument against murder and destruction, the same strategic benefits can be obtained through cooperative strategic investment, and so a pro-social strategy always favours cooperative investment over war.

The politics of energy capacity, or more generally any industry's competitive landscape, are  usually corruptible.  While there is obvious net social benefit to increasing energy capacity such that the price per kilowatt could be driven down to $.05 or even $.01, it is to every energy producer's advantage if every other energy source is constrained.  So collectively, energy suppliers want to politically curtail energy supply expansions.  There is a collective energy supplier strategic political investment to oppose the social strategic benefits of expanded energy supply.

Direct government investment in the west tends to be constrained from ownership stake, based partly on the propaganda that if the government/society owns part of a project it is anti-capitalist.  That reluctance is also justified by potential favouritism for a partially-owned-by-government company versus competitors, by bureaucratic resources needed to monitor the company, and by politicizing blame for any company activity onto the current government.  Grants, loan guarantees, tax credits and other giveaways are often preferred even if they lack any government/social returns for the investments.  Government loans would increase the capacity for strategic investment compared to giveaways, because a loan program is likely to be self-sustainable, and if a business wants free money, but would refuse a loan, then it likely doesn't truly need the money.

Another constraint on strategic investment goals, is that often nationalist and xenophobic politics try to block partnerships or local ventures from sovereign strategic funds and even foreign private corporations.  While there is unknowable (but not disprovable) fear of foreign control, sovereign funds should have their own concerns in forming foreign ventures or partnerships since, in the event of diplomatic breakdown between nations, their assets and ownership stake can be unilaterally seized.

Debt financing in general, and Natural Finance Soft Loans specifically, are the most appropriate means to achieve strategic interests.  Debt achieves the strategic objective of funding and encouraging a project.  It does so without controlling the project direction.  Natural Finance Soft loans, as compared to traditional debt, provides more flexibility for projects by timing repayments around revenue and increasing borrowing capacity, and provides lower risk to borrowers by ensuring funds are used for their purpose and implementing management austerity measures when revenue is not coming in sufficiently.

The primary scenario for private company pure strategic investment is increasing competition to your suppliers or increasing your potential customers or improving their ability to buy.  The objective of cutting supplier costs or improving quality can be achieved by funding alternative suppliers without the requirement of controlling their activities or ensuring a large share of their profits.  Offering new suppliers affordable loans (as compared to expensive loans) makes them more likely to be successful and provide affordable products (successfully achieve strategic indirect benefits).

National and social strategic investment can be grouped into 2 broad categories that are also divisible between supply and demand sides.  Energy, food, materials and infrastructure are a common national strategic supply focus.  Employment, welfare, wealth redistribution and service subsidies are demand side strategic benefits.  While most demand side benefits are addressed with long term progressive taxation policies and entitlements, strategic intervention decisions tend to focus on the supply side or employment.  

Tax payer funded strategic initiatives/investment would gain better tax payer acceptance if the plan included at least return of capital.  Loans rather than giveaways serve that purpose.  The other issue is that the electorate generally needs to be more aware and vociferous about is anti-social investments such as war, and anti-competitive efforts that curtails energy production or other innovation.

Natural Finance as Strategic national benefit
The general social benefits of natural finance stems from funding more organizations, and so creating associated jobs.  The natural finance comptrollership function further employs highly skilled people from accounting, finance, relationship-banking and legal backgrounds.  Because natural finance focuses on repaying investors, and re-obtaining financing for new projects and expansions, money flows through the economy more rapidly (boosting it) rather than remain hoarded in corporate coffers or tied up in the stock market.  If natural finance is successful in replacing equity and bond markets as the primary investment mechanism, then there would be a more direct relationship between investors and borrowing enterprises, and so a more socially productive role for investors and financial professionals.

Specific strategic benefits exist for sovereign funds and pension funds.  Sovereign and national funds can invest without governance control of the enterprise and so can avoid any xenophobic concerns, or accusations of cronyism or blame for borrower actions.  For pension funds, enabling a competing financial exchange (natural finance) provides another outlet for their investments.  In addition to lower risk and higher returns, natural finance loans focus on rapid repayments, and so enhance the cashflow back to investors/pension funds.

Charity vs Social benefits from strategic investment
Strategic investments that offer social benefits such as environmental quality, economic activity and job stimulation, and poverty assistance can offer similar pride, satisfaction, or public relations value to charitable giving.  While charitable giving is necessarily more selfless than a low return or break-even investment, the latter is likely more sustainable.  For example, building and selling affordable housing at break even, allows you to build and sell another house perpetually for the same investment, whereas gifting the house allows you to help just one person.

Lesson for society
Strategic investment for social benefit is a somewhat neglected tool for a community to help itself be prosperous and happy.  It is also relatively difficult to  recognize private investment groups or companies for making investments with social strategic benefits, usually because the greed of direct returns on the investment is not visible.  Companies or Government that make loans to projects with social benefits should do so to both help society and help their own image.  Its probably a more effective tool than government giveaways or certain forms of charity, and should be recognized as a viable tool.


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