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Lessons to Learn from East Asia’s Response to COVID-19

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Lessons to Learn from East Asia’s Response to COVID-19

The proximity of the likes of Hong Kong, Taiwan, and Vietnam to China, the epicenter of the COVID-19 outbreak, meant initial forecasts of the virus’s impact were grim. Both public and economic health looked certain to be under serious threat. Yet in stark contrast to much of the Western world, these East Asian nations appear to have the situation under control.

Few to no new cases are being reported here from week to week, while figures continue to spike daily in Brazil, Russia, and elsewhere. But how have they done it, and what can the West learn from East Asia’s handling of the outbreak?

A fast and decisive response

The crucial element in East Asia’s early response – and one perhaps missing elsewhere – was speed. Taiwan, Vietnam, Singapore, Hong Kong, and South Korea all acted swiftly to ban or quarantine incoming visitors. Smart test and trace programs and widespread public mobilization have further contributed to success in limiting the advance of the disease. Taiwan in fact began monitoring the health of travelers on the very day China announced the discovery of the virus to the world.

Lessons learned from previous health crises

Hong Kong suffered the most deaths outside of mainland China During the SARS epidemic of 2002-2004, while Taiwan had the world’s highest mortality rate. Both nations in particular were driven by a desire to do better if and when another virus struck.

Despite a fumbled state response, Hong Kong’s residents began wearing masks almost universally and distributing sanitization supplies to areas in need. The Taiwanese government meanwhile was far better prepared than it had been almost two decades earlier, with public movement quickly curbed and hospital capacity under constant review.

Resilient economies

Investors monitoring global markets with online brokers such as Tickmill may find encouragement in East Asia’s economic response. Taiwan, for example, resisted a full lockdown, meaning that economic activity, while still stunted, has not suffered to the degree it has elsewhere. Residents have stayed at home more than they otherwise would but are buying online while continuing to work. In Hong Kong meanwhile, life is returning to normal, with many public and private spaces back welcoming visitors. Success in containing the disease should provide a more stable foundation for economic recovery.

Takeaways for the West

There are important lessons for the West to take away should another disease spread in the future.

Countries will need to strengthen the medical supply capacity closer to home while working with producers to find ways to plan ahead, respond quickly, and save lives. East Asia’s response has also demonstrated the potential of digital strategy and how, in the context of a pandemic, it can monitor and protect society en masse.

Can Emerging Economies Afford a “Green” Recovery from COVID-19?

The dramatic slowdown in industrial production, energy demand and transport activity in the first quarter of 2020 has led to significantly lower levels of air pollution, sparking debate over whether the coronavirus outbreak will lead to long-term shifts in consumer and industrial behaviours that could reorient economic policy towards sustainable development goals. 

However, rising public debt, combined with significant capital outflows and reduced exports, will make financing green investments a challenge for many emerging markets as their governments seek viable strategies for kick-starting their economies once the disruption from the pandemic subsides.

A report by the International Renewable Energy Agency (IRENA) projected that accelerating investment in renewable energy could underpin the global economy’s COVID-19 recovery by adding almost $100trn to GDP by 2050.

In addition to helping curb the rise in global temperatures, the IRENA report claims that ramping up investment in renewable energy would effectively pay for itself over the long term, by returning between $3 and $8 for every $1 invested, and quadrupling the number of jobs in the sector to 42m over the next three decades.

While welcoming direct spending on infrastructure as a tool for stimulating economic growth after the coronavirus crisis, Thura Ko, managing director of Myanmar-based YGA Capital, cautioned that green energy projects should still be vetted carefully to ensure they are well planned and cost-effective.

“This is particularly important if the government has had to resort to emergency sources of funding, such as borrowing, grants or even quantitative easing. Certainly, if a green energy initiative makes sense and is efficient, then the government should initiate investment there – but not all green energy initiatives are efficient,” Ko told OBG.

As governments consider the role that investment-linked to sustainable development goals could play in post-pandemic stimulus measures, recent polling data indicates that voters across emerging and developed economies are broadly supportive of a “green” economic recovery from COVID-19.

In a survey conducted by Ipsos across 14 countries in April, 65% of respondents said it was important for their government to prioritize climate change mitigation actions in their post-COVID-19 recovery strategies. The figure was as high as 81% in India and 80% in China and Mexico, and fell as low as 57% in the US, Germany and Australia.

Green commitments in the “yellow slice”

Almost all countries globally have ratified the 2015 Paris Agreement, committing them to reduce carbon emissions with the aim of ensuring that global temperatures do not rise more than 2°C above pre-industrial levels.

This includes all countries in the “yellow slice” of the global economic pie: those high-potential emerging markets that makeup Oxford Business Group’s portfolio.

The 10 countries of the ASEAN bloc are committed to collectively meeting 23% of their primary energy needs from renewable sources by 2025.

However, the transition towards renewables in South-east Asia is complicated to some extent by the region’s plentiful reserves of coal, which are viewed by some policymakers as a reliable and cost-effective option for quickly scaling up generation capacity to meet domestic power demand.

Prior to the outbreak of COVID-19, China and Japan were ready sources of finance for coal-powered energy projects in the region, but there are some indications that this is changing.

In April, two of Japan’s largest banks – Sumitomo Mitsui Banking Corporation (SMBC) and Mizuho – announced commitments to curb their financing of new coal power projects under renewed pressure from environmental groups.

Since January 2017 Mizuho, SMBC and fellow Japanese bank Mitsubishi UFJ Financial Group have accounted for 32% of direct lending to coal power plant developers, so Japanese banks’ decisions to rein in lending to the segment will create a significant gap in the financing ecosystem for such projects.

Elsewhere, GCC countries have made steady progress in adding to their renewable energy capacities, in tandem with efforts to diversify their economies away from dependence on hydrocarbons.

The UAE has been at the forefront of this transition and is now home to approximately 79% of installed solar photovoltaic capacity across the GCC’s six members. The country aims to generate 44% of its domestic power needs from renewable sources by 2050, the highest proportion in the region.

Meanwhile, 10 countries in Latin America and the Caribbean – led by Colombia – have set a regional goal of meeting at least 70% of electricity needs from renewable sources by 2030.

In Africa, where 600m people still do not have access to electricity, IRENA has proposed grid interconnections and the development of regional energy corridors as viable mechanisms for extending low-cost wind and solar energy to all countries, as well as enabling cross-border access to hydropower and geothermal energy.

Funding the transition

While climate change can be viewed as a systemic risk to the long-term development of emerging economies, it remains to be seen if governments in such countries will go beyond prior commitments to incorporate large-scale investments in green energy and infrastructure into their post-COVID-19 recovery strategies.

With business and household demand expected to remain depressed for some time after the worst health effects of the crisis subside, policymakers will be required to enact further policy measures to stimulate economic activity.

“If stimulus packages simply return countries to where they were before COVID-19, we will face the same problems tomorrow that we faced yesterday: low productivity, high pollution, and locked-in, carbon-intense economic structures,” Stéphane Hallegatte, lead economist of the World Bank’s Climate Change Group, told OBG.

“The most efficient stimulus packages will be the ones that are designed to create many jobs and support economic activity over the short term, but also get economies on track for rapid and sustainable growth post-COVID-19. Countries can use this spending to make them 21st century-ready by investing in developing the skills of their population, but also in a modern, zero-carbon infrastructure system and a healthy environment.”

If required investments can be catalyzed, green energy and infrastructure development can be particularly effective at addressing depressed demand because they can create a relatively high amount of jobs while also laying the foundations for sustainable long-term growth.

World Bank data indicates that mass transit projects, building retrofits to enhance energy efficiency and renewable energy plants are much more effective at job creation than fossil fuel projects. Looking further ahead, such projects should contribute to lower air pollution, which should simultaneously help to lower mortality rates and boost labor productivity.

Unlike the situation after the 2008-09 financial crisis, the cost of renewable energy generation is now competitive with fossil fuels, meaning fewer trade-offs between short-term pains and long-term gains when evaluating renewable energy investment decisions.

However, Hallegatte recognizes that many energy and public transport projects take a long time to prepare, and argues that they should be added to stimulus packages now – possibly by reviewing and updating existing plans – for the benefits to start being felt in six to 12 months.

He added that emerging economies could explore various avenues for financing such projects, including the state budget, offering attractive incentives to private firms and requesting support from multilateral finance institutions.

Looking further ahead, redirecting fossil fuel subsidies towards more productive and sustainable areas of the economy, as well as introducing energy or carbon taxes, could become part of the tool kit for channeling investment towards green infrastructure.

Private equity (PE) could also prove to be an effective alternative source of funding for green infrastructure projects, as many funds are now assessing new strategies for the recovery phase, but they are likely to become more discerning about where to allocate capital.

“PE funds will be even more selective and scrutinous than before. Underlying business prospects in a post-COVID-19 environment must be clear and visible. A link to sustainable development goals can add to the investment appeal – particularly in relation to an eventual exit – but this does not detract from the need for a business model to be robust and clear,” YGA Capital’s Ko told OBG.

For Ulrich Volz, director of the SOAS Centre for Sustainable Finance, emerging economies should also look at developing their domestic capital markets in order to become less reliant on foreign portfolio investment, which tends to migrate quickly towards developed market assets at the first hint of a crisis.

By doing so, they would be better placed to fund domestic investments through domestic savings, which in the past have predominantly been invested in advanced countries for relatively low returns.

“Some will claim that, in times of crisis, developing and emerging economies won’t be able to afford the ‘luxury’ of green or sustainable investments, but this is a very short-sighted view,” Volz told OBG.

“Growth that is not sustainable undermines long-term development. The COVID-19 crisis shows how risks that seem very far away and abstract can hit us with a vengeance. I would hope that sustainability risks will receive even more attention because of the current crisis.”

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This article originally appeared on oxfordbusinessgroup.com. Republished with permission.

global trade

Global Trade Talk: Reconfiguring US-China Supply Chains for a Post-Coronavirus World

Global Trade Talk is part of an ongoing series highlighting international business, trade, investment, and site location issues and opportunities. This article focuses on the conversation between Jack Perkowski, JFP Holdings Ltd., and Keith Rabin, KWR International, Inc.

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Hello Jack, how are you? It has been a long time since we last talked. Before we begin, can you tell us about your background and current activities?

After graduating from Harvard Business School, I went to work on Wall Street, joining Paine Webber, where I served for 20 years and ended up running the Investment Banking Department. I then decided to do something different for a second career and became interested in Asia. That led to a trip to Hong Kong in 1990 and my moving there in late 1991. I quickly decided within Asia, China was the key driver, and in 1992 made my first trip to the Mainland.

At that time, China’s auto market was small and fragmented. They were manufacturing about 500 thousand vehicles a year, but it was clear the country wanted to develop a large auto industry. However, foreign companies were slow to enter because volumes were too small, so to encourage investment, the government allowed foreigners to have majority ownership in automotive components companies. That is now allowed in most industries in China, but at the time, auto components were the only industry where this was permitted.

I decided to do a roll-up buying majority ownership in a dozen leading auto component companies; putting them under one umbrella; introducing new management and quality systems. To test whether this could work, I visited 100 factories in 40 cities, and concluded it was a viable strategy. I then went back to Wall Street and raised $150 million over the Christmas holidays in 1993 to fund the company. In February 1994, I founded ASIMCO Technologies, an automotive components company focused on China’s emerging auto market. A year later, we raised another $150 million. Over several years, we invested $300 million, which is a lot of money even today. In 1995, though, it was a very large sum.

ASIMCO evolved into a company with 12,000 employees, 17 factories and about a billion dollars in sales. In 2009, ASIMCO was sold to Bain Capital, and I started JFP Holdings, which helps foreign companies to determine whether there is a market in China for their product, service or technology. We also help Chinese companies to expand in overseas markets. We are very hands-on, undertaking research, and then helping our clients to effectively develop and implement their strategies and ongoing business operations.

Almost ten years ago we published an interview with you titled “Profiting from China’s Domestic Economy” concerning China’s rise over several decades to become the world’s second-largest economy. Can you talk about China’s emergence and the role it now plays in the world economy?

China’s growth has been very rapid and it became the world’s second-largest economy about the time we spoke in 2010. Its GDP was about $1.3 trillion in 2001 when it joined the World Trade Organization (WTO) – and over the past 20 years, it has grown by more than tenfold to about $14 trillion. In contrast, the US remains the world’s largest economy, at about $22 trillion.

Japan, which had been in second place, is now third, at about $5 trillion – so there is quite a drop from second to third place. Therefore, if you are a company looking for growth, China is very important. It is hard to see how in coming decades a company can maintain or build a global leadership position if it does not have a meaningful presence there. This is reflected in the Fortune 500 list, which now has as many Chinese firms included as from the US.

Per capita income in China has also risen to around $10 thousand a year. That, however, is a bit misleading, because it is an average. It includes an emerging middle and upper class of more than 500 million people, which is about 1.5 times the entire population of the US. These people largely live in major cities and are rapidly increasing their consumption. McKinsey, for example, estimated [1] last year that China delivered more than half of global growth in luxury spending between 2012 and 2018 and is expected to deliver 65% of additional spending into 2025.

This is important. US companies and policymakers need to think of China – not only in terms of manufacturing and sourcing – but also as an important driver of global growth. Therefore, while we need to address the dangers of being over-reliant on China in our supply chain, we also must remain aware of China’s growing global market share, so we can benefit and participate in a fair, constructive and competitive manner.

It is true that China’s economy is increasingly driven by consumer demand. It has also become an important source of R&D and innovation – trends that have risen dramatically since we last talked. Can you talk about this phenomenon, where China stands, and what it means to the US and companies and investors?

Unlike many who located factories in China as a way to reduce the costs of US production, I did not set up ASIMCO as an export company. Our emphasis was on becoming an important part of the local auto market. At the same time, we worked with foreign companies such as Bosch, Caterpillar, and others that sourced components in China, but viewed that as an extra revenue source and a way to ensure our factories could produce to international standards. Lowering labor costs was certainly a factor, but not the central element of our strategy, as I knew costs would rise as China developed. Toyota, for example, is a company that takes a similar view and doesn’t really embrace cost alone as a strategy. It has always wanted its suppliers to make components locally where possible so they can be close to where they are being used. That has been our approach as well.

Bottom line – to benefit from growth in China you need to be there. That is the only way to truly understand and participate. When we began, potential Chinese customers told us they would not take us seriously unless we had a factory there. That is important. The Chinese understand networks and supporting firms follow production. This leads to investment, infrastructure, and development of auxiliary industries and innovation within the supply chain. Academic institutions also respond and take steps to train engineers and others with the critical skills needed. This leads to advanced research and an ability to apply technologies and launch success stories. These make investors comfortable and provide additional benefits – which have value not only in China – but in other markets around the world.

With respect to innovation, few Americans realize how rapidly China is developing in areas including digital technologies, consumer payments, e-commerce, and services. In some areas, it is becoming more advanced than the US and we can learn from them. It is important to keep this in perspective and to balance the need to address trade issues and strengthen and safeguard our supply chain with the need to remain present and involved in this increasingly important market. This is the way we can sustain and advance growth and our global competitiveness.

At the same time, there is a legitimate concern in the US about Chinese technology. I spoke to a group of tech executives and investors in Jackson Hole last year. All they wanted to talk about was China’s development of 5G. While there are security implications if Chinese 5G equipment is installed in the US, you can’t blame China for taking steps to move up the value chain. The US also needs to upgrade our capacity and competitiveness – and our ability to develop the products, services, and supply chains that are needed moving forward.

China’s growth has heightened its political ambitions and in recent years we have seen growing tension in the South China Sea, the pursuit of the Belt and Road Initiative, control over rare earth metals, rising tariffs and trade disputes, blockage of Huawei and a generally more competitive posture than in the past. This has strained bilateral relations with the US and led to anxiety in Asia and other countries. What does this portend for China and US-China relations moving forward? Considering these developments and backlash over China with coronavirus what changes are we likely to see from China in respect to its trade and bilateral relations with other nations and multilateral institutions?

China joined the WTO in 2001 and there has since been a sharp uptick in every economic measure. Its economy has grown about ten times and the country has clearly benefitted from globalization. Meanwhile, the US and the rest of the world looked the other way as many Chinese policies and business practices during this period have been in violation of international trade practices. We have been like two ships passing in the night. No one, regardless of who was in the White House, wanted to address contentious trade, IPR, technology transfer, and other key issues.

Every year there was a state dinner or two and leaders of each country would shake hands, but important issues were never discussed in a direct, constructive way. President Trump has done this for the first time and the dynamics have changed. Up until the coronavirus, however, most of the world considered the Trade War as “Trump’s Trade War,” but the virus has caused trillions of dollars of damages throughout the world, and now many more countries will be concerned about China’s behavior. This will place more pressure on both Chinese companies and the government – and the country will have to adjust. At the same time, China’s leadership is going back to its more authoritarian roots, and no one likes that —least of all the Chinese people.

While many of China’s relationships with other countries are likely to be more confrontational going forward, I remain optimistic. At the beginning of the year, a phase one US-China trade agreement was signed. When it came out, many said the US did not get what it needed, and others said it was like the “unequal” treaties China entered with western powers in the 19th and early 20th centuries. I knew it could not be both and read through it.

Everyone has focused on the provision that says China will buy significant merchandise from the United States over the next two years, but the agreement also deals with IPR, currency manipulation, and other key issues. Most importantly, it includes an arbitration mechanism that provides for quarterly meetings between the US Trade Representative and China’s Deputy Prime Minister where issues of non-compliance are discussed and resolved. To me, this seems like a better approach than trying to take Chinese companies to court.

The real question is will the phase one deal be implemented? In my view, the economic devastation that has resulted from the coronavirus ensures that it will. The US and the Trump Administration want the purchases to go through and China wants tariffs to be lifted. So both sides are under pressure to comply. In a curious way, while our countries are at odds at the governmental level – there are real incentives to work through these important issues – which many in China also would like to see resolved. As a result, I believe the virus will help to build consensus and facilitate the implementation of the January 15th agreement.

The COVID-19 coronavirus is having a dramatic effect on global health as well as the global economy and China. What is the current situation in China? How has the virus affected its economy, and can we trust the data that is emerging? What lessons can we draw from the Chinese experience and what changes might result in respect to US-China and global economic relations and trade moving forward?

I don’t know the exact number of cases and deaths in China, and you can certainly fault their transparency and failure to alert the rest of the world. But, once China recognized the seriousness of the virus, the government imposed draconian measures within its borders that could not be applied here. For example, in the US you cannot rope off and restrict millions of people or undertake the kind of contact tracing and restrictions seen in China.

In this way, China was able to arrest the spread of the virus but nonetheless took a big hit in the first quarter. The second quarter will also not be great. China is, however, implementing stimulus measures – not the roads, bridges, and the infrastructure spending we saw after the 2008 financial crisis – but measures to increase the development of 5G and other technologies that were outlined as key industries in the country’s “Made in China 2025” plan.

As a result, China is likely to have a strong second half. The IMF predicts 1.3% annual growth in 2020. This is certainly down from the double-digit growth enjoyed over recent decades, but it is still positive. The bottom line is, while China is still practicing social distancing, imposing precautions, and incurring hardships, the country is largely back to work. We know that because we deal with businesses and factories all over China, including Hubei province where the virus originated. From what we see, the factories are close to full production. China was the first to take the hit, and it is now the first to recover. Beginning in the third quarter, we think growth will pick up and China is likely to see a V-shaped recovery.

For decades the US embraced China’s rise, and production moved there so companies could reduce costs, raise profitability, and access a new, large emerging market. That began to change with growing concerns over jobs, income inequality, and supply chain security. This sentiment accelerated as President Trump began to impose tariffs and even more now with the coronavirus. The result is more serious talk about bringing jobs and production back to the US. Is this possible and what would it mean for US companies, policymakers, and our economy?

It is definitely possible. A lot of production in the US moved to China in recent decades and the pendulum went way too far in that direction. Many jobs were lost; there was social dislocation, and the security of supply chains for a number of key products has been endangered. At the same time, while the US still possesses research and development advantages, foreign-based supply chains, industrial infrastructure, technical expertise, and networks place us at a disadvantage when it comes to implementation and development.

Much of the offshoring was motivated by the search for lower labor costs – but I think tax and regulatory issues in the US also played a role. So, while we need to address environmental concerns and keep to high standards, we must make the country more attractive if we are to bring companies back. This is particularly true in industries where there needs to be a US presence. That is something that has become even more apparent as trade and political disputes further aggravate this imbalance, and now with the coronavirus, logistics and transportation disruptions have caused inventories to run low.

We are also seeing and helping clients and companies to shift production out of China to Southeast Asia and other emerging markets. This is being done to optimize and diversify supply chains, maintain cost competitiveness, minimize tariff exposure, and to allow access to these growing markets. This is true not only for the US but also for Chinese, Japanese, Korean, European, and other firms. What considerations should companies consider as they reconfigure supply chains and their approach to international markets?

Every company needs to use this time to reexamine its supply chains to determine where they are vulnerable. If they don’t do that – they are simply not doing their job. Governments need to do that as well. If you don’t want the pharmaceutical and other critical industries and materials dependent on China or other nations, it is not enough to criticize foreign practices. You also have to provide real alternatives and incentives to bring production back here. This is true both from an inventory as well as an investor and national security standpoint.

Industries will not, however, come back to where they were in the 1970s and 1980s. The world has changed and we are now far more integrated than we were in the past, both in terms of supply and demand. While the need to address this issue has been clear for some time, US-China trade tensions and the coronavirus have accentuated the need to readjust. Until recently, companies were content to leave production in China as investments and this capacity was already in place – even though many factories were set up at an earlier time when labor costs in China were lower and conditions less developed.  Now, however, as it has become clear how dependent we are on foreign supply, there is more incentive to reevaluate. In many cases, customers, stakeholders, and investors will demand it.

Some of that production will come back to the US, but where cost remains a key determinant, much of it will go to other countries, such as those in Southeast Asia. A concern I have, however, is these countries are so much smaller than China there is a limit to how much production can be shifted there. There is also less opportunity to sell into the local market. Depending on the industry and location, infrastructure and services may also be lacking.

For example, in China, about 25 million vehicles are now manufactured annually, and there has been substantial investment into forging, casting, and other needed functions. These are expensive operations that are hard to replicate. At the same time, Southeast Asia is relatively close, and we are seeing interest from both foreign and Chinese companies to move at least part of their operations there. Because they offer an opportunity to diversify, countries like Vietnam are benefitting from the shift. Other Southeast Asian countries also provide benefits and need to be examined.

A major obstacle in moving jobs and production back to the US is the need to rebuild and upgrade infrastructure as well as our educational, immigration, and healthcare systems to provide the skills and environment needed to allow the transformation that must unfold. What steps need be taken by the US, state, and local governments if we are to rebuild our manufacturing capacity and to both repatriate production that moved offshore and new trade and investment back to the US?

We definitely have the ability to compete. We need to rebuild parts of our economy, but the cost and scope of a large national infrastructure program will be huge and complex, as is education, immigration, and healthcare reform. I believe, however, these goals will be achieved over time.

We also possess many advantages. For example, we are now an energy exporter and able to supply ourselves at low relative costs. Our universities and capital markets also provide strength.  The largest obstacle I see is the need to reduce regulation and institute favorable tax policies.  Addressing the devastating impact of the coronavirus on small businesses, which employ the vast majority of our population, is also now a major, if not our most important, priority. We need to get these people back to work ASAP.

Over the years, we have worked for many economic development agencies as well as private developers to facilitate their efforts to attract trade, investment, and business activity within a range of sectors. Drawing from your experience, what advice can you give to US companies and economic development agencies seeking to attract foreign trade and investment and business partners to enhance their businesses, local economies, and international competitiveness.

There are certain things economic development agencies can do tax-wise to provide incentives and create a welcoming business environment. At the same time, it is especially important to clearly and effectively position themselves to demonstrate competitive advantage and why their cities or states are attractive destinations, while also demonstrating their support for companies who relocate there.

When you travel around China, as we did when we arrived, local authorities roll out the red carpet. They make you feel wanted and have an interest in supporting your development. In contrast, I recently accompanied a Chinese manufacturer to a US Midwestern State as they contemplated setting up a facility there. One of their requests was to meet with local officials. The company we were working with was at first unsure who to meet with but eventually set up a meeting.

The officials were very nice, but it was clear this was unusual and they were not accustomed to meeting foreign companies. They were unsure of what they could contribute and did not seem to understand why they were there. In China, local governments are much more determined and willing to play an active role in wooing investment. In a sense, they try to be partners with businesses that base within their jurisdictions. That seems almost a foreign concept here.

As a result, US companies and economic development agencies should be more active and aggressive – to reduce barriers, provide incentives, and demonstrate an interest in attracting businesses that want to base in their city or state. They also need to demonstrate clear reasons as to the benefits of the location – so decisions are based more on value than on cost alone.

Thank you Jack for your time and attention. Look forward to following up soon.

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Keith Rabin serves as President at KWR International, Inc., a consulting firm specializing in international market entry, site location and trade, business, investment and economic development; as well as research and public relations/ public affairs services for a wide range of corporate and government clients.

[1] https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/China/How%20young%20Chinese%20consumers%20are%20reshaping%20global%20luxury/McKinsey-China-luxury-report-2019-How-young-Chinese-consumers-are-reshaping-global-luxury.ashx

How Opportunity Zones Could Help Restore the Economy After COVID-19

The COVID-19 shutdown has created financial setbacks for millions of Americans and their communities, but economic troubles – whether caused by the pandemic or otherwise – don’t hit everyone equally.

“Unfortunately, there are many rural and urban areas across our great nation that have become distressed due to a variety of circumstances and factors – and that was true for these areas even before COVID-19,” says Jim White, founder and president of JL White International and author of Opportunity Investing: How To Revitalize Urban and Rural Communities with Opportunity Funds (www.opportunityinvesting.com).

“These areas cover the entire breadth of our nation and their populations are diverse. Poverty is a condition that does not discriminate, impacting people of every race, creed, color, gender, and age group, though it does strike minorities with far greater severity.”

But despite the problems, White says, those distressed communities have the potential to provide one path back both for the economy and for investors seeking to diversify with alternatives other than the stock market.

How so? Through the Qualified Opportunity Zone program, which Congress created in 2017 to encourage economic growth in underserved communities. The 2017 Tax Cuts and Jobs Acts provided tax benefits to investors who invest eligible capital in these opportunity zones to create retail, multifamily housing, manufacturing or other improvements. To qualify, the areas must meet certain specifications related to such factors as the poverty rate and the median family income. There are more than 8,000 opportunity zones nationwide.

“I believe, as we move forward to reinvigorate the economy, investing in our poorest communities is going to be the right avenue to take,” White says.

White says a few reasons opportunity zones could be an important and effective part of the recovery include:

Improvements to distressed communities will build on themselves. If businesses in the zones thrive, the communities will have more jobs and better salaries to offer. “More people will want to relocate to these areas, which will increase real estate values and breathe new life into local shops and stores,” White says. When residents and business owners are doing well, they spend more money on beautifying their homes, storefronts, public buildings, streets, parks, and monuments. Their infrastructure will improve, crime will decrease, and better health care will be available for residents.

Investors can make money as well as save on taxes. Those who invest can benefit from more than just the initiative’s capital gains tax breaks, White says. They also can see a significant return off their investments.

Investors also can help improve people’s lives. The zones give investors who want to do more than just make money a chance to have a positive impact on low-income urban and rural communities, and the lives of millions of people. “Investments have already worked miracles in several American communities and we are only at the early stages of experiencing their capabilities,” White says.

“These opportunity zones can simultaneously channel economic help to distressed communities, and create an outsized return for investors,” White says. “Both these things will be critically important as we try to bring back jobs and restore the economy coming out of the pandemic. If nothing else, the coronavirus is teaching us that we are all in this together, and that all of us, across the country and globally, must be responsible for one another.”

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Jim White, Ph.D, author of Opportunity Investing: How To Revitalize Urban and Rural Communities with Opportunity Funds (www.opportunityinvesting.com), is founder and president of JL White International. He also is Chairman and CEO of Post Harvest Technologies, Inc. and Growers Ice Company, Inc., Founder and CEO of PHT Opportunity Fund LPX. Throughout his career, he has bought, expanded, and sold 23 companies, operating in 44 countries. He holds a B.S. in Civil Engineering, an MBA, and a PhD in Psychology and Organizational Behavior.

rule of law

Rule of Law is the Bedrock of Trade Agreements

Trade agreements promote rule of law

One could argue that the fundamental goal of any trade agreement is to promote and undergird government adherence to rule of law, which in turn enables private economic activity to thrive. When coupled with commitments to market access, individuals and companies are free to do business anywhere in the world.

Trade agreements such as the newly congressionally approved U.S.-Mexico-Canada Agreement contain provisions designed to directly combat corruption and promote good regulatory practices. They also contain myriad requirements that support best administrative practices including publishing changes to regulations, allowing for public comment, and adhering to transparent processes for government tenders, for example.

What is rule of law where trade is concerned?

No country gets it perfectly right. Supporting rule of law requires vigilance, upkeep and continual improvement.

Impartial review and scrutiny can be a powerful incentive for self-reflection. In 2013, the U.S. Chamber of Commerce launched an effort to measure the qualities that companies look for “to make good investment and operating decisions..in any given market.”

Its resulting Global Rule of Law and Business Dashboard identified five broad factors to assess rule of law: transparency, predictability, stability, accountability and due process. Are the laws and regulations applied to businesses operating in the market readily accessible, easily understood, and applied in a logical and consistent manner? Do governing institutions operate consistently across administrations or are decisions arbitrary and easily reversed? Can investors be confident that the law will be upheld and applied without discrimination? Does the judicial system allow for disputes to be resolved through fair, transparent, and pre-determined processes?

That’s so “meta”

The Chamber didn’t recreate the analytical wheel – it developed a “meta measure” of rule of law for business by combining underlying indicators from several established indices.

The list includes the World Economic Forum’s annual Global Competitiveness Report, the World Justice Project’s Rule of Law Index, Transparency International’s Global Corruption Barometer, the Heritage Foundation’s Index of Economic Freedom, and several World Bank survey and index products including the Doing Business reports that have been long used by governments as roadmaps for reforms. By pulling relevant pieces of these indices, the Chamber computes a composite score to rank 90 markets.

Sunshine is the best disinfectant

Rating and publishing information about the operating conditions in the marketplace can be one of the best ways to shine light on corruption and poor governance, sometimes prompting a healthy competition among governments to show improvements that will attract more businesses.

Increasing all forms of private investment, including foreign direct investment, is critical to sustaining economic growth for most countries. Over the last few years, however, multinational companies have been reducing their foreign direct investments. In 2018, FDI flows dropped 19 percent from to $1.47 trillion to $1.2 trillion.

Companies consider many criteria when evaluating where to do business. Respect for rule of law is often a decisive factor over whether companies can or will participate in an overseas market. Without sufficient rule of the law, the risks are too great and the return on investment jeopardized. Having a high degree of confidence in rule of law is clearly correlated with where FDI flows. Other than the large emerging markets of China, Brazil, Russia, Mexico and India, the top recipients of net inflows of FDI between 2000 and 2017 are the same countries that ranked highly on the Global Rule of Law and Business Dashboard.

Room for improvement

Unsurprisingly, Singapore, Sweden, New Zealand, Netherlands, Australia, Germany, United Kingdom, the United States, Japan and Canada comprise the economies held the top ten slots on the Rule of Law and Business Dashboard released in July 2019. (China fell from 19th in 2017 to 26th in 2019.)

Bottom 10 smaller framed

And, unsurprisingly, countries beset by political instability and civil strife remain stuck at the bottom of the index. Here in the Americas neighborhood, Guatemala and Honduras, Nicaragua, El Salvador and Mexico are all perilously close to bottom of the list, something we should be concerned with and engage these countries on as important trading partners.

Importantly, the Chamber report points out that, “income is not necessarily a predetermining factor in terms of the strength of the rule of law and business environment.” Senegal and Kenya, with a per capita GDP of just around $3,458 and $3,292 respectively, score similarly to South Africa with its per capita income that is almost four times higher.

In producing the study, the Chamber seeks to induce positive changes across the board over the long run. Although the Global Rule of Law and Business Dashboard hasn’t been conducted long enough with a full complement of countries to tout a concrete impact just yet, the Chamber reports that the aggregate score does seem to be moving in right direction, increasing from 51.63 percent in 2015 to 56.77 percent in 2019. Even the United States pulled its score up more than four percentage points from 2017.

The best kind of competition

Benchmarking is a valuable approach, not merely to expose flaws but as a way for governments to identify and adopt reforms yielding proven results for other countries. Governments can even market an improved ranking to potential investors.

While we often measure the outcomes of trade agreements by the volume of trade, the biggest victory may be the least appreciated: the subtle but important improvements to the way our trading partners respect the rule of law as applied to their own citizenry – and to ours.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

 

Spinnaker Investment Group

Andrew Krongold Named Partner at Spinnaker Investment Group

Vice President of Investments Andrew Krongold has been named partner in Spinnaker Investment Group, announced company CEO and Chief Investment Officer Morgan Christen. Krongold joins Christen and company president Joseph Stapleton as partners in the seven-member firm, which has more than $330 Million in assets under management.

Krongold has served as Vice President since the firm’s launch in 2016, providing CFO-level services for businesses and individuals such as customized investment management, life insurance, pension plans, and executive compensation solutions. At Spinnaker he provides leadership on the firm’s investment committee and guides marketing and technological innovation efforts.  He holds numerous licenses and professional designations, including Chartered Retirement Planning Counselor.

“We are proud to welcome Andrew as an equity partner of Spinnaker Investment Group,” Christen said.  “He is one of the big reasons we have been named among Orange County’s fastest-growing companies for two years in a row.  Andrew not only continues to provide his clients with world-class financial services but also is a valued community leader making a difference in Southern California.”

Krongold developed a passion for investments and teaching others about investing at an early age. He made his first stock purchase at 13 and chose wealth management as a career path soon after graduating from high school.  “As a kid I was fascinated with the idea that you could buy a piece of a large company,” he said.

Trading stocks and managing 401k plans early on provided great perspective on the highs and lows investors experience, he added.  “Having personally experienced the emotions associated with both making and losing money, I knew I wanted to join a firm that was independent and focused on the needs of clients, rather than be obliged to sell the financial products offered by a large institutional firm,” said Krongold.

Andrew is active in the community of Orange County where he is a mentor with Big Brothers Big Sisters of Orange County, a Board member for the NextGen division of the Jewish Federation & Family Services of Orange County, and a board member of the Tocqueville Society of Orange County United Way. In 2019, Krongold was named one of “40 under 40” by the Irvine Chamber of Commerce, in recognition of his accomplishments and service.

A graduate from the University of California San Diego with a Bachelor of Arts degree in Economics, Krongold and his wife are residents of Costa Mesa, Calif.

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About Spinnaker Investment Group, LLC:

Spinnaker Investment Group, LLC is a privately owned, boutique Investment Company that cares deeply about its clients and is committed to helping them realize their financial independence.   The company’s mission is to deliver the highest level of comprehensive wealth management service, helping customers achieve their financial goals and ultimately establish a safe, secure future.   With more than 30 years of combined investment experience, the Spinnaker team supports this mission by providing expert financial planning, wealth planning, retirement planning, asset management, securities and insurance.  For more information, visit www.SpinnInvest.com.

How Small Business Should Think About Financing

It’s no secret that over half of small businesses close their doors within the first five years. One of the critical problems that often occur has little to do with the innovation, ingenuity, or work ethic of the small business owners themselves, but rather the lack of access to sufficient capital to cover the ebbs and flows of their operation and its associated costs. 

Scaling any idea or enterprise, to me, is less often about “entrepreneurship” —and other catchy terms we can print on a business card— and more about meeting the demands of others, like payroll and customer expectations. Simply put: small business owners need capital resources— they need cash. 

Historically, small businesses have had limited options to access capital: savings, friends and family, credit cards, traditional bank loans, or the occasional SBA loan. Enter the financial crisis of 2008-2009, which ushered in a new regulatory environment that contracted these historic capital resources, thereby creating the market-driven need and demand for non-traditional banking options.

Consequently, we find ourselves operating in a new era, one in which enterprising nonbank funders have brought novel and different capital products to the small business market. This has been largely accomplished through an ambitious mix of fintech and financial innovation. These previously unavailable financing options give small businesses more resources to consider than ever before. Now their next step is to explore them and consider how their small business might decide on the best option for their specific needs. 

As we contemplate these innovations, here’s a quick list of some of the best financing options available to small businesses:

Business Term Loans: Best for businesses looking for working capital, equipment purchases, or to purchase inventory or other fixed assets. For short-term loans, it can often be matched to a specific project and repaid to coincide with the completion of that project in 6 to 12 months. For longer-term loans, the repayment can be stretched out to 3 to 10 years, but these often require higher levels of collateral coverage or a personal guaranty by the business owner. 

Pros: Great product for larger one-time investments with targeted cash loans flow that payments can be matched. 

Cons: Larger dollar amounts and a longer payback term will require increased time, energy (think: bank meetings and interviews), and documentation. 

Equipment Financing: Best for one-off purchases like restaurant equipment and machinery. 

Pros: no upfront spend; if the business owner has impaired credit the fact an asset is involved as collateral can make it easier vs. purchasing the equipment; and tax-deductible.

Cons: Overall cost is usually more expensive in the long-run; cost inclusive of fees if the lease is terminated early can be substantial; and must take into account all terms and conditions that can be complicated (who handles and addresses a break-down in the equipment? etc).

Small Business Administration (SBA) Loan: Best for business owners who need capital for a variety of longer-term business expenses. It is government guaranteed so the process can be daunting and is processed through a bank that has an SBA loan program. 

Pros: Cost and longer-term repayment; great product for owner-occupied real estate.  

Cons: Requirements are strict; process is time-consuming (60 to 180 days); high upfront fees; and requires strong personal credit scores.


Business Line of Credit (“LoC”): Best for businesses with more volatile sales and cash flow. Flexibility to drawdown and repay based on the needs of your business.  Often secured by accounts receivable and inventory. Some LoC’s offered by FinTech operators do not require business collateral but do require a personal guaranty.  

Pros: Can access quickly (assuming facility is in place) to solve urgent issues or expenses; and great for managing working capital needs and the business’ short-term cash flow needs.  

Cons: Reporting can be much more intensive vs. other products available; upfront and ongoing fees can be expensive, especially if the LOC is rarely drawn down.


Revenue-Based Financing: This is a financing option where the repayment schedule is tied to the future revenue of the business. The genesis of the product is that the funder operates as more of a partner and is taking some level of “equity-risk”. If the revenue decreases or the business fails, the repayment is either stretched out or in the case the business fails the funder has no recourse. Small businesses can utilize this product for project financing, working capital, growth investments, or short-term needs. 

Pros: Quick access; repayment risk mirrors the revenue; no business or personal recourse except in the case of fraud.  

Cons: Products are generally 12 months or less; more expensive given level of risk with limited recourse; reporting can be intensive as changes to payment schedules requires bank and financial verification.

Invoice Factoring: The business can turn its unpaid invoices into immediate cash. The invoice factoring company collects directly from the customers and distributes capital to the business, net of its fee. 

Pros: good for managing cash flow; typically a short-term financing product (30 to 90 days).  

Cons: cost can be expensive, especially if repaid much quicker than anticipated; can be disruptive notifying customers to change their payment instructions to the factoring company; requires technology integration or higher level of reporting and the business’ customers will be dealing directly with your funder if they delay payment – not you as the business owner.  

Angel Investors/ Venture Capital: Best for small businesses who want to scale quickly. 

Pros: entrepreneurial background provides increased insights and foresight vs. dealing with alternative finance providers, banks, or the government; larger investor network to leverage for additional funds or additional business; and capital remains in the business (vs. interest costs). 

Cons: Higher rates of returns expected (typically at least 5x their investment); requires giving up equity in the business; process will be intensive; typically reserved for high visibility, disruptive companies pursuing large addressable markets on a national or global scale; and will require operating agreement additions to governance to protect their investment in the case of underperformance.

Bootstrapping: Best for businesses with principals that have savings or expendable income who want to preserve equity ownership and cash in the business. 

Pros: maintain ownership position and keeps all cash generated either in the business or available for dividends. 

Cons: Growth limited to the owner’s cash position; risk missing market opportunity because thinly capitalized; challenging if a short-term need requires more cash than available.

While the pros and cons of this list provide a guide to financing in 2019, any financing decision should ultimately come down to your assessment of the cash flows of the business (today and in the near term), demonstrated capacity to handle credit, costs versus profit opportunity (positive ROI), and repayment thresholds. 

The good news is, enabling technology allows small business owners to access various forms of capital quickly and efficiently. There is no day like today to explore options to fund entrepreneurial dreams. 

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Vincent Ney is a founder and CEO of Expansion Capital Group, a business dedicated to serving American small businesses by providing access to capital and other resources so they can grow and achieve their definition of success. Since inception, ECG has connected over 12,000 small businesses nationwide to approximately $350 million in capital 

AI

How AI can Amp Up Thematic Investment Strategies

One of the persistent criticisms facing equity investors is their short-term view. They are characterized by adding or dropping stocks as the quarterly earnings roll in. Thematic investment, on the other hand, provides one counterpoint to earnings-focused stock picking.

Thematic investing  – a strategy designed to capitalize on broad economic or social changes – has seen increasing use in recent years. In 2016, thematic funds accounted for 30% of new ETFs introduced, on topics ranging from obesity, millennial consumption habits, and health and fitness.

Yet, asking questions about anything long term can be complex and often obscure. The trends and themes themselves that will reshape economies may be easy to identify, but translating them into quality investment vehicles is another matter. Using themes like clean energy, disruptive technologies, aging populations, or emerging markets to structure portfolios comes with its own unique challenges: successfully sifting genuine long-term trends from flash-in-the-pan fads – and critically, doing so early – is no easy task. Good analysis requires a massive amount of diverse data that, once structured in a way, it would facilitate thematic analysis.

A Knowledge Graph-based framework is uniquely positioned to provide both the data and analytic framework, with the inference capabilities necessary to provide actionable insights into large data sets.

A properly built Knowledge Graph describes the interrelations between real-world entities through a multidisciplinary, multidimensional correlated structure, comparing common themes and concepts across hundreds of millions of data assets over several years of correlated data embedded into the Knowledge Graph.
Such a framework can automatically calculate thousands of strategies for any investable concept an investor can think of – ranging from sustainability themes like clean energy to disruptive technologies like 5G or cloud computing.

A functional Knowledge Graph can rapidly build new, flexible strategies for thousands of concepts, deriving insights from millions of combined sources, and in ways that a typical analyst approach cannot match. Data sets can have global coverage – with strategies tailored to and applicable to multiple regions and countries – while also being highly specialized. They’re equally capable of taking in structured and unstructured data sets; everything from news reports, SEC filings, and financial or macroeconomic reports to court opinions and clinical trial data or patents. This multidimensional approach powers a dynamic point-in-time Knowledge Graph framework to produce exposure indices with precision.

Knowledge Graphs can further offer special insights in building a thematic investing portfolio through the way they look at concepts, both – quantitative (AAPL stock prices or its fundamental indicators for example) and qualitative. This offers not only the numbers behind what makes a wise investment, but also the context behind those numbers, which is especially critical when tracking themes.

Taking that capability a step further, it can also weigh data points based on the strength of their correlation to a given data set, or screen against undesirable exposure that might at first glance appear to be on theme. This scoring can be done at the entity level, offering sourced data on every point used in the process. When the process is complete, the final index that is produced has been weighed on multiple levels, accounting for variables such as market caps and liquidity for each company, and the aggregated exposures.

This type of analysis illustrates one of the key strengths of thematic investing: its concentration. Thematic investments are typically concentrated on a smaller selection of stocks but a Knowledge Graph framework offers the opportunity to build thematic strategies based on a larger constituents basket. This pushes market analysis away from being a purely reactive prospect; through identifying anticipated changes in the world, investors can take a forward-looking approach to capitalize on opportunities as they are forming, leading to potentially greater long-term growth opportunities.

Contrast that approach with mutual funds, which are typically concentrated on 40-80 stocks in a portfolio. The emphasis is generally on diversification, which manages risk, but is not necessarily the optimal way to achieve growth.

Some funds have already begun to turn to technology to do some of this critical analysis work. The AI-powered International Equity ATF (NYSEArca: AIIQ) has been doing just this since 2018. The fund runs on the Equbot Model, a proprietary algorithm that compares and analyzes data points and international companies on a daily basis to find and optimize portfolio exposures.

With a properly designed framework, a Knowledge Graph’s AI-based exposure engine can draw inferences to understand the dynamic market trends constantly driving returns while promoting concepts investors feel strongly about. Properly deployed, AI-based thematic investment strategies can instantly create new strategies or power existing ones – and in a fraction of the cost and time that traditional analysis could yield.

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Ruggero Gramatica is founder and CEO of Yewno, innovator of the Knowledge graph that generates actionable knowledge from today’s vast informationYewno has created an extensive multi-domain knowledge graph using proprietary AI algorithms, combined with a multi-disciplinary technology platform that extracts insights and delivers products and services tailored to specific industries. Yewno generates actionable knowledge from the ever-increasing amount of information available today.

As a pioneer in the Knowledge Economy and the innovator of the proprietary Yewno Knowledge Graph, an artificial intelligence-based framework powered by billions of disparate data sources, Yewno provides continuously evolving inferences that uncover unexpected insights for financial services, education, life sciences, government and beyond.  By delivering more meaningful intelligence, Yewno is revolutionizing how information is processed and understood, enabling users to more quickly analyze complex problems and improve decision-making. For more information, visit https://www.yewno.com/.

Want In On The Fintech Trend? 4 Options For Funding Your Startup

Fintech companies are becoming significant players in the U.S. economy, with firms such as Credit Karma, Tradeshift and Plaid enjoying extraordinary success as they use technology and innovation in an effort to transform the financial services industry.

In 2018, for example, fintech investments in the U.S. reached $11.9 billion, a new annual high, according to CB Insights.

But despite the favorable trend, fintech startups also face the same reality that all startups do – raising the capital to launch a business is no easy feat.

The good news for fintech entrepreneurs, though, is that we are well past the time when investors might have viewed fintech as a fad that would pass.

“I think that most investors have come to understand that fintech is here to stay,” says Kirill Bensonoff (www.kirillbensonoff.com), a serial entrepreneur and an expert in blockchain.

“Finance is getting more and more high tech each year.”

Still, coming up with sufficient capital to start any business – whether it’s from your own savings, a loan from a relative, or cash from an investor – can present a formidable problem.

“One lesson I’ve learned over the years is that successful entrepreneurs must be persistent,” Bensonoff says. “You will face challenges and one of those could be raising capital. Perseverance will get you through.”

Options for raising that capital include:

-Venture capital. Venture capitalists might be inclined to invest in your startup in exchange for an equity stake if they think there’s a chance they can score a big return. But they will need convincing. “The failure rate for new businesses is high, so it’s only natural for investors to be skeptical about whether you can pull it off,” Bensonoff says. “Any investment is a risk, and venture capitalists know that. But smart investors want it to be at least a calculated risk, not a roll of the dice.”

-Crowdfunding. If venture capital is not an option, crowdfunding could be the next best bet, Bensonoff says. Online crowdfunding platforms allow you to make your pitch in one spot where a myriad of different potential investors can see it. Examples of startups that used crowdfunding are Oculus and Skybell.

-Angel investors. An angel investor is an accredited investor who uses his or her own money to invest in a small business. Not just anyone can be an angel investor, though. They need to have a net worth of at least $1 million or a minimum annual income of $200,000. Bensonoff himself has served as an angel investor for some companies.

-Self-funding or “bootstrapping.” For those who want to bootstrap their fintech company, relying on their own money rather than the investments of others, there are options. Some people tap into savings or retirement accounts. Many keep their day jobs and make their startup a side business until it takes off. “Bootstrapping has always been an important approach to my life,” Bensonoff says. “I had to rely on my own money and hard work to succeed, and I had to remain frugal. When bootstrapping becomes a way of life, it opens up new opportunities.”

In Bensonoff’s view, raising capital to launch a fintech company isn’t any harder – or easier – than raising money for any other type of business.

“I think a good company in any sector gets funded,” he says. “So for entrepreneurs who want to plunge into the fintech sector, the key is to develop something that’s useful and satisfies an economic want.”

About Kirill Bensonoff

Kirill Bensonoff (www.kirillbensonoff.com) has over 20 years experience in entrepreneurship, technology and innovation as a founder, advisor and investor in over 30 companies. He’s the CEO of OpenLTV, which gives investors across the world access to passive income, collateralized by real estate, powered by blockchain. 

In the information technology and cloud services space, Kirill founded U.S. Web Hosting while still in college, was co-founder of ComputerSupport.com in 2006, and launched Unigma in 2015. All three companies had a successful exit. As an innovator in the blockchain and DLT space, Kirill launched the crypto startup Caviar in 2017 and has worked to build the blockchain community in Boston by hosting the Boston Blockchain, Fintech and Innovation Meetup.

He is also the producer and host of The Exchange with KB podcast and leads the Blockchain + AI Rising Angel.co syndicate. Kirill earned a B.S. degree from Connecticut State University, is a graduate of the EO Entrepreneurial Masters at MIT, and holds a number of technical certifications. He has been published or quoted in Inc., Hacker Noon, The Street, Forbes, Huffington Post, Bitcoin Magazine and Cointelegraph and many others.

How Millennials Are Changing The Investment Game

Millennials are on the verge of becoming big players in the investment field.

Baby boomers, according to Forbes, are about to pass an estimated $30 trillion in assets down to millennials within the next few years. This generational transfer of wealth gives millennials many options on investing — starting with the investment firms they choose.

Understanding millennials’ mindset on investing and, just as importantly, learning their personality traits, preferences and dislikes, are crucial to any investment firm seeking to help them allocate their assets. For starters, millennials’ approach to investing is distinct to previous generations, and they handle money and choose the people who they entrust with that money very differently, too.

Those factors will have several ramifications for how assets are allocated in the next three, five, 10, 20, and 30 years. That’s why discovering how to connect with millennials so that they feel confident enough to trust you with their funds is critical.

How do millennials differ from previous generations, including their investment approach? Here are some revealing distinctions:

They’re more entrepreneurial. Whereas their parents, baby boomers, valued job stability and scaling the corporate ladder, millennials are more inclined to build their own businesses and take greater financial risks. They’re confident that even if they lose some money, they can earn it back — facts firms should consider as they approach this generation and brainstorm investment solutions.

They’re wary of Wall Street. After the Great Recession, many millennials were forced to take on student loans because their parents couldn’t afford college tuitions. So if they’re not entirely warm to the idea of Wall Street, what do millennials trust? Where do they see themselves putting the $30 trillion they’ll one day inherit? This group of investors favors commodities and options and they’re also more likely to put money in exchange-traded funds than their baby boomer parents.

They’re impassioned about helping the world. Millennials want to serve a greater purpose to humanity. This common trait has given rise to the concept of “impact investing” — intentionally putting money in companies or organizations that offer a financial return but also contribute funds toward creating a positive social or environmental impact.

They often don’t trust advisors. According to a study, 57 percent of millennials don’t trust advisors, believing they’re in it more for self-serving purposes than for their clients’ best interests. What they want is someone who wants to build a relationship with them and works toward gaining their trust.

So knowing how millennials and their investment thoughts are unique, how should investment firms navigate this young crowd of investors and best position themselves to reap the business of this generation, both today and in the coming years? 

Create trust and be transparent. Investment firms can build a foundation to better serve the millennial generation by fostering relationships, customizing your advice, and being clear about fees. For example, millennials, unlike baby boomers, prefer flat fees over commission-based pay models; that’s what they’re most familiar with through the advents of Uber and Netflix.

Explore technology. Millennials like technology but they also like simplicity and convenience. Look for ways to leverage technology to make experiences simpler, more self-serving, and more convenient for millennial users. Robo-advisors and digital investment content platforms and tools are just the start of the options available to explore. If they find it inconvenient or complicated to do business with you, they’ll do it with someone else.

Be a great communicator. While technology and self-service drive them, millennials also appreciate a human touch in the investment space, meaning a hybrid of tech and human would be the ideal mix for them. Find out how your millennial client likes to communicate — by text, email, messaging via a digital investment content platform, or on the phone. And when you are communicating, remember to be an advisor, not a dictator. Millennials appreciate insight, but they still like to be the one controlling decisions that impact them.

Use data to customize recommendations. Track clients’ online activity to gather data about them and use this in conjunction with their personal preferences to send them customized investment ideas, alerts, and recommended products.

It comes down to this: Millennials and baby boomers are as different as rotary phones and text messages, and newspapers and podcasts. And they’re just as varied in their viewpoints of success and allocation of material wealth.

Therefore, if advisors truly want to stay relevant in the investment game, they’ll have to work hard to build rapport with this generation and show good will to retain them as clients both currently and into the future.

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Gui Costin (www.guicostin.com), author of the No. 1 Bestseller Millennials Are Not Aliens, is an entrepreneur, and founder of Dakota, a company that sells and markets institutional investment strategies. Dakota is also the creator of two software products: Draft, a database that contains a highly curated group of qualified institutional investors; and Stage, a content platform built for institutional due diligence analysts where they can learn an in-depth amount about a variety of investment strategies without having to initially talk to someone. Dakota’s mission is to level the playing field for boutique investment managers so they can compete with bigger, more well-resourced investment firms.