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Globalisation of trade has resulted in huge trade surpluses in many countries, particularly in Japan, China and other Asian nations. If you combine this with the build-up of foreign reserves in oil exporting countries, thanks to soaring prices, then you find some countries sitting on piles of US dollars, Euros and Sterling.

What do the governments of such countries do? They set up Sovereign Wealth Funds (SWFs) as vehicles for investing their foreign currency reserves. And looking for investing opportunities, they turn their attention to western European and the US financial markets (that provide a wide range of investment opportunities in financial and real assets). The main objective of most SWFs is to maximise returns on their investments.

In theory we can explain the phenomenon of state owned SWFs investing in foreign securities and assets in fairly simple terms. The financial markets exist to bring together the funds surplus units and the funds deficit units.

The recent crisis in banking industry illustrates this well. The consequences of sub-prime and credit crunch left many multinational and large banks needing fresh capital to bolster their capital base. In the UK, for example, HBOS and Royal Bank of Scotland tried to raise capital through rights issues. Both could not get enough subscription from their existing investors.

“their investments have helped stabilise the global financial markets”

SWFs have stepped in, and are injecting large amounts of money in multinational banks, including the British bank Barclays. Since the US sub-prime mortgage crisis their investments have helped stabilise the situation in global financial markets.  

A turbulent international financial system has an impact on the economic growth of the developed world. The developed world is the major market for manufactured goods (exported from China, Japan, South Korea) and oil (exported from the Middle-East, Russia and Nigeria). So an unstable global financial system can seriously threaten the economic progress in developing countries. And, of course, the investments that bring this stability are in the interests of source countries’ interest!

SWFs are not new, but they’ve attracted more attention in recent years. The Kuwait Investment Authority (KIA) was set up in 1953 and the Norwegian government set up their Global Pension Fund in 1990 to manage the surplus revenue from oil and gas exports to provide for future generations. So SWFs are not the preserve of fast growing countries such as China or South Korea. They’re been set up by Australia, Canada, Angola, Russia, some states of the USA, Ireland and even East Timor.

However, the western world is becoming concerned about the lack of transparency of SWFs, and the possibility of SWFs gaining control of domestic companies. Advised by the US, the International Monetary Fund is engaging with the major SWFs to agree on voluntary standards for transparency and governance mechanisms in order to allay these fears.

“governments are not known to be good managers of assets”

It seems worth bearing in mind that governments are not known to be good managers of assets, be it financial assets or public enterprises. And SWFs are essentially state owned financial institutions. Will sovereign wealth funds prove to be exceptional in the long-term? Data about these funds is scarce, so it won’t be easy to find reliable empirical evidence on their performance. Meanwhile, we can only watch and wait.

Weblinks

• Join the discussion
• Watch the Who's Buying up Britain trailer
• Calling companies to account
• Gold...always believe in?
• Sovereign Wealth Fund Institute
• International Working Group
• Equity finance  - OpenLearn unit
• The financial markets context - OpenLearn unit

Courses

• Issues in international finance and investment
• Financial strategy

About the author

Devendra Kodwani is Lecturer in Finance at the OU Business School. His research interests include the economic regulation of utilities and he has written several papers on privatisation and regulation.

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Although the credit crunch has, for the time being, slowed the frenzied pace of merger and acquisition activity, there are still some very interesting deals going on that tell us a lot about why firms choose to acquire some businesses and sell off others.

Co-op, Northenden Road, Sale.
[image by jlcwalker, some rights reserved]

For example, the Co-op has just bought Somerfield for £1.5bn, giving them a combined share of about 8% of the grocery market in the UK, still far behind the “big four” of Tesco, Asda, Sainsbury and Morrisons, but now a long way ahead of the next biggest, Waitrose. At the same time, the Spanish bank Santander agreed to buy the Alliance and Leicester for about £1.2bn. By contrast, the Economist newspaper recently reported that sell-offs have been growing steadily to over 12,000 globally last year, citing examples such as General Electric (GE) selling off its home appliances division and the Royal Bank of Scotland trying to find a buyer for its insurance business. Why do firms do this? Just the management time and legal costs are huge, so what advantages do they seek when, as academics refer to it, they adjust their portfolio?

Well, it’s a long and complicated story and much of this activity destroys rather than creates shareholder value, but research in this area points to some key lessons both about the motives for merger and acquisition activity and what makes some work and some fail.

Firstly, firms buy other firms for one of two main reasons. Either they are trying to be more competitive in their existing market or they are trying to enter (or leave) a market. The Co-Op/Somerfield deal is an example of the former as they hope that the new, enlarged, Co-Op will have more economies of scale than the two separate firms. That’s an important consideration in a market where size matters and you are competing with much larger and stronger players like Tesco. As an example of the latter reason, behind the GE disposal lies their analysis that they can make more money investing in their other businesses (such as medical technology or jet engines) than they can with relatively low-margin washing machines and the like. With shareholders breathing down their neck, getting the best return on investment is top priority for conglomerates like GE.

So, whatever the reason behind a merger, acquisition or disposal, what is it that makes some work and others fail? A little while ago, I was asked to research this in the specific context of the medical technology sector and spent several months interviewing CEOs who had been through successful and not so successful deals. It turned out that there were lots of lessons to be learned, but none of them seemed specific to that industry. Rather they were general lessons that applied to most firms. In total, I identified 20 lessons for CEOs and the need to get so many things right helps to explain why many mergers don’t make money.

These 20 lessons were described elsewhere (see further reading), but perhaps the two key lessons were about synergy and culture. Mergers or acquisitions work best when they create synergy, so that the combined business is stronger than the parts. This is most likely to occur when the two merging firms are different and complementary rather than similar and overlapping. And to be turned into profit, synergy needs to be supported by complementary cultures. Too often, the basic values and beliefs of two sets of employees can conflict . When that happens, culture clash can reduce, rather than enhance, effectiveness.

So, what seems like a mysterious wheeling and dealing between highly paid executives (and often better paid lawyers) is in fact driven by a commercial logic. Whether trying to compete more strongly or trying to enter or leave a market, merger and acquisition activity is an important part of corporate strategy. And its only the beginning, because then the hard work of making mergers work begins. Finding synergy and managing cultures can take months and years. As if often said, mergers and acquisitions are a little like marriages: the wedding is the easy part.

Further reading

• Lessons for CEOs from the consolidation of the medical device and diagnostic industries by Brian D. Smith, in International Journal of Medical Marketing. Available free as a PDF from the author: brian.smith@pragmedic.com
• 'Desperately seeking synergy' by M Goold and A Campbell, in Harvard Business Review
• 'Culture Couture', by Brian D Smith in Pharmaceutical Marketing. Available free as a PDF from the author: brian.smith@pragmedic.com

About the author

Dr Brian D Smith is a Visiting Research Fellow in The Open University’s Marketing and Strategy Research Unit. He is the author of over 100 books and articles and runs PragMedic, a specialist strategy consultancy.

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The word entrepreneur has become one of the most commonly used terms in the modern business vocabulary as the British economy has undergone a major period of restructuring  following the launch of the enterprise culture in the early 1980s.

Despite these developments there still appears to be considerable doubt as to what the word actually means and what characteristics distinguish successful entrepreneurs from the more conventional and possibly less successful business figures. In the UK an entrepreneur is differentiated from an owner-manager of a small business (a lifestyler) on the basis of their ideas being highly innovative, the fact that they adopt a strategic approach to the running of their businesses and they are driven by motives of high growth. In the USA the definition is more generalised insofar as an entrepreneur is anyone who establishes a start up business  irrespective of whether it is based on a innovative idea or not.

Entrepreneur Duncan Bannatyne.
[image © copyright BBC]

Another important question is whether there is a typical person who becomes a successful entrepreneur, an archetype on which we can base our judgements about someone’s aptitude for entrepreneurship? Can anyone become an entrepreneur or does it require a certain type of person to make it really work? If it does require certain attributes are they innate or can we acquire them – in other words are successful entrepreneurs born or made?

The influence of the business founder or nascent entrepreneur  on a small business is crucial, particularly in the early days when enterprises are inseparable from their founders. They are conceived by them and survive (or not) because of their personal commitment and dedication. In later stages of growth, a management team may emerge which makes the enterprise more autonomous and capable of surviving without the founder.

Since this impact is so vital to small business survival it is important to identify and encourage the personality types who are most likely to succeed and to discourage those who are not. A number of traits or personality characteristics have been put forward such as the `Big Five` personality dimensions which include: the need for achievement, the need for autonomy (or independence), an internal locus of control (or self-determination), a risk-taking propensity and self-efficacy (or self-belief). Since these entrepreneurial traits are formed during childhood  and cannot be developed later there is and strong implication that entrepreneurs are born not made.

A further characteristic of the entrepreneur is their ability to innovate. According to the late Peter Drucker, entrepreneurship and innovation are tasks that can be and should be organised in a purposeful way and are part of any manager’s job whether he or she works in a small or large enterprise. The entrepreneurial manager is constantly looking for innovations through an organised and continuous search for new ideas. Drucker presented entrepreneurs not as people who are born with certain character traits but as managers who know where to look for innovation and how to develop it into useful products or services once they have identified the strategic space or market gap. Drucker therefore believed that these competencies could be learned and developed and involved a continuous purposeful search for new ideas and their practical application.

There are also other personality traits associated with entrepreneurs which include: a proactive approach, self-motivation, a tolerance of uncertainty and ambiguity, opportunistic behaviour, creativity, vision, impatience, energy and charisma.

It is therefore hardly surprising that successful entrepreneurs appear to be superficially so diverse. This may also have something to do with the socio-economic characteristics of their environment in terms of both the national and market conditions in which they operate and compete. These will also vary greatly from country-to-country and from sector-to-sector.

Finally, if Peter Drucker was right then perhaps the enterprise initiatives that have been launched across the UK have a high probability of success or is it more complicated than that?

Further reading

• Organisations Evolving by H Aldrich, published by Sage
• `The Entrepreneurial Personality; Past, Present and Future` by E Chell, in Occupational Psychologist number 38
• Innovation and Entrepreneurship by P Drucker, published by Heinemann.
• The Achieving Society by D McClelland, published by Van Nostrand
• `The Dark Side of Entrepreneurship` by M Kets de Vries, in Harvard Business Review November-December 1985  

About the author

Nigel Walton is an associate lecturer for the Open University and the University of Worcester, specialising in strategy, entrepreneurship and international marketing. He previously worked as a management consultant, primarily advising medium-sized companies with growth problems.

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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

So why do people go to festivals? That was one of the questions I had in mind when I was planning my research on festival audiences. Rather than just the muddy field variety, however, I decided to look at a range of festivals and my choices included a plush opera festival, a town-based folk festival and an indie-pop festival on the edge of a city.

Interviews with a selection of the punters from each festival revealed some interesting insights. First, I wanted to find out how people had acquired a taste for a particular type of music – a musical ‘habitus’ in French sociologist Pierre Bourdieu’s terminology – so I asked people about their life landscapes, to build up background about them. Bourdieu’s ‘cultural capital’ theories suggest, for example, that early family life and school experiences could have helped to sow the seeds of musical taste.

Festival goers at Glastonbury.
[image © copyright BBC]

I did find that, for some, a certain style of music had always been part of their lives: one folk festival interviewee told me, "I’ve been going to folk festivals since before I was born." She still loved to go to several a year, 25 years on, sometimes still sharing the experience with her Mum.

In contrast to this comment, though, one opera festival visitor claimed: "My parents weren’t interested in the kind of music I’m interested in." For him, it was really at school that his interest in classical music germinated. He particularly remembered one teacher lending him a recording of the opera, Peter Grimes, to listen to, which was his early introduction to opera. Another opera festival visitor had clear memories of a teacher playing the piano as they went into assembly: "I now know that all those tunes she played were Mozart and Beethoven and Schubert."

School was not always a positive force for the development of musical taste, however, with one folk festival interviewee lamenting that "singing was not a terribly happy event for me at school," after a teacher had made fun of his performance. He is now an accomplished folk singer despite this discouragement, though! So perhaps early musical experiences had sown the seeds of musical taste for some of the festival visitors as Bourdieu suggests.

"many impulses, some conscious, some perhaps unconscious, inspire punters to go and stand in that muddy field and listen to music at a festival"

I then moved on to ask the festival interviewees about their later musical encounters. What did stand out was the importance of the late teenage years in musical taste development. Landmark events at the age of 19 were described by two people, for example. One opera festival interviewee spoke of his National Service posting in Vienna, which provided the opportunity to make use of regular free tickets to opera performances. This person had just enjoyed his 525^th individual opera – which doesn’t include the many alternative versions of the same opera he had seen – over 50 years later, at the festival I was studying.  Also at the age of 19, a move to university had opened the eyes of one indie-pop festival interviewee’s eyes to punk rock. Nearly 30 years later he was still reading the NME every week and had just been to Glastonbury again, as well as to the festival at which I met him.

Even in their 50s, the tastes of some of the interviewees continued to develop. An Open University music course had provided the inspiration for one opera festival interviewee to attend her first opera 10 years before, at the age of 55, and she had been going to opera ever since. This was the same lady whose teacher’s piano playing had encouraged an early and continuing love of classical music, so perhaps it was those early seeds that were being further nurtured and diversified.

It wasn’t just people’s life landscapes that seemed to be providing motivations for attending festivals though, and the chance to bond with friends – or to build ‘social capital’, as Bourdieu’s terms it – was another big pull, as was the chance for some to boast about the festival to others afterwards. It wasn’t just tales about seeing the ‘big names’ that these punters were keen to impress others with, though. What was perhaps more important to many of them was to see something fresh and new. The opera festival goers wanted to be able to add another different opera to their compendium, the indie-pop fans wanted to be the first to see the next big star, and the folkies were keen to discover that previously unknown acoustic singer-songwriter playing in a corner of a field to an ever-expanding impromptu audience.

So it seems that many impulses, some conscious, some perhaps unconscious, inspire punters to go and stand in that muddy field and listen to music at a festival.

Further reading

Distinction: a social critique of the judgement of taste, Bourdieu, Pierre (1984 [1979]), Cambridge, Mas, Harvard University Press

'The forms of capital' in Biggart, N. W. (Ed.) Readings in economic sociology, Bourdieu, Pierre (2002 [1986]), Malen, Mass, Blackwell, (pp. 280-291)

Weblinks

• Join the discussion
• A survival guide to music festivals
• FolkArts England
• Arts Council: Arts debate
• British Arts Festivals Assocation
• eFestivals.co.uk

Courses

• An introduction to business studies
• Marketing and society
• Investigating entrepreneurial opportunities
• Managing customers and quality
• Music courses at the Open University

About the author

Linda Wilks is a PhD student at the Open University. Her research is investigating how social and cultural capitals shape attendance at music festivals.

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