Rawi Abdelal

Ayesha Khan

Tarun Khanna

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">The Idea in Brief</h4>
 <div class="ideainbrief-contents">
  <p>Soaring oil prices are doing a lot more than just hurting consumers’ pocketbooks. Oil-rich countries are using their petrodollars to reshape the entire global economy, maintain authors Abdelal, Khan, and Khanna.</p>
  <p>Consider: Gulf nations are bailing out the West financially; for example, buying U.S. securities and financing major portions of America’s trade deficit. Even more important, they’re investing aggressively in Middle Eastern and African markets that Western firms are neglecting. And they’re creating world-class industries at home—so they can thrive even after oil reserves run dry.</p>
  <p>What does all this mean? Potential partners, emerging competitors, and capital infusions will increasingly come from oil-rich states. Top talent will defect from the West to the Gulf Cooperation Council states, lured by high-end management opportunities and salaries.</p>
  <p>Western companies that ignore these new realities risk missing out on new opportunities, falling prey to new threats—and being muscled off the global economic stage.</p>
  <p>The Idea in Practice</p>
  <p>To remain competitive, Western businesses must understand how oil-rich nations are transforming the world.</p>
  <h2>Reshaping the West</h2>
  <p>Oil exporters’ surplus petrodollars are affecting the West in three ways:</p>
  <p><strong>Financing capital shortfalls.</strong></p>
  <ul>
   <li>Oil-rich countries make up an increasing share of the net capital flowing into the United States. Through direct and indirect investment, they’re financing roughly one-quarter of the United States’ current-account deficit.</li>
  </ul>
  <p><strong>Partnering with and investing in Western companies.</strong></p>
  <ul>
   <li>Gulf states are embarking on a wave of M&amp;A deals with Western firms. And they’re buying minority stakes in Western companies operating in industries as diverse as energy, banking, telecommunications, and hospitality.</li>
  </ul>
  <p><strong>Competing for talent.</strong></p>
  <ul>
   <li>To execute on their newly aggressive investment and development strategies, oil-rich countries are pulling leadership talent from an already limited global pool. This strategy includes recruiting new hires from the United States and Europe—as well as from India and Pakistan, key talent sources for the West.</li>
  </ul>
  <h2>Reshaping Emerging Markets</h2>
  <p>Oil exporters are exploiting lower asset prices and mopping up entire market segments in some emerging economies that Western players are hesitant to enter. Western majors in these markets are increasingly being relegated to supporting roles. <span style="idea-in-practice-example"><span style="idea-in-practice-example-header">Example:&nbsp;</span> </span></p>
  <p>Zain, a Kuwaiti mobile telecommunications service provider, has acquired 20 companies in the Middle East and Africa, growing from 600,000 to 45 million+ customers, with $5.9 billion in revenues. Expanding steadily, it aspires to join the ranks of the top 10 mobile telecoms worldwide. Western majors like Vodafone have had to sit up and take notice. </p>
  <h2>Reshaping Home Countries</h2>
  <p>The Gulf region is intent on creating a name for itself as a center of innovation through two means.</p>
  <p><strong>Developing a world-class industrial and service economy.</strong></p>
  <ul>
   <li>Abu Dhabi’s government-owned investment vehicle Mubadala Development Company (MDC) has been charged with transforming Abu Dhabi into the hub of the Arabian Gulf region. Through savvy partnering with companies in industries such as financial services, health care, microprocessors, and alternative-energy technologies, MDC has channeled vital resources into the Gulf. It’s attracting low-wage labor from Asia—and high-wage managerial and technical talent from the around the world.</li>
  </ul>
  <p><strong>Creating a parallel financial market.</strong></p>
  <ul>
   <li>Interest in financial instruments that comply with Islamic law (including bans on interest, excessive risk, and investment in “sin sectors”) is surging around the world. Gulf petrodollars are flowing into companies that provide such instruments. Western companies that ignore this trend may miss out on an important opportunity to generate new revenue streams.</li>
  </ul>
 </div>
</article-ideainbrief><p>Petrodollars abound—again. The combination of the gigantic American trade deficit and the price of oil at more than $125 per barrel (at press time) has created a pool of financial liquidity among oil exporters in the Gulf Cooperation Council states. The GCC—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—experienced similar surpluses, of course, during the 1970s and early 1980s, when oil prices were comparably high. But this era of liquidity is markedly different from the last.</p>

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<p><span class="reprint">Reprint: R0809K</span></p>
<p>The combination of the gigantic American trade deficit and the price of oil at more than $125 per barrel (at press time) has created an attendant pool of financial liquidity among oil exporters in the Gulf. And this era of petrodollar surpluses is markedly different from the last one.</p>
<p>In the 1970s, the member states of the Gulf Cooperation Council (GCC)&#8212;Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates&#8212;outsourced the management of their petrodollars to American and UK bankers. This time around, they have adopted active investment and development strategies: They are investing heavily in large Western organizations as well as in emerging markets in Africa and India. They are spending lavishly at home to establish institutional infrastructures, to create free-trade zones for manufacturing and services, and to build recreational facilities that will attract businesses, skilled knowledge workers, and tourists.</p>
<p>These moves are destined to have long-run effects not just on their local economies but also on regional and international trading, argue Harvard Business School&#8217;s Abdelal, Khan, and Khanna. In fact, the authors say, the actions of the GCC states are pulling the Gulf closer than it has ever been to the center of the international financial system. In this article, the authors consider how oil exporters&#8217; new investment strategies and interests over the next decades will affect the economic landscape in the West, reshape nearby markets in the Middle East, and dramatically reconfigure the GCC home environment itself.</p>

Where Oil-Rich Nations Are Placing Their Bets

Reprint: R0809K The combination of the gigantic American trade deficit and the price of oil at more than $125 per barrel (at press time) has created an attendant pool of financial liquidity among oil exporters in the Gulf. And this era of petrodollar surpluses is markedly different from the last one. In the 1970s, the member states of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—outsourced the management of their petrodollars to American and UK bankers. This time around, they have adopted active investment and development strategies: They are investing heavily in large Western organizations as well as in emerging markets in Africa and India. They are spending lavishly at home to establish institutional infrastructures, to create free-trade zones for manufacturing and services, and to build recreational facilities that will attract businesses, skilled knowledge workers, and tourists. These moves are destined to have long-run effects not just on their local economies but also on regional and international trading, argue Harvard Business School’s Abdelal, Khan, and Khanna. In fact, the authors say, the actions of the GCC states are pulling the Gulf closer than it has ever been to the center of the international financial system. In this article, the authors consider how oil exporters’ new investment strategies and interests over the next decades will affect the economic landscape in the West, reshape nearby markets in the Middle East, and dramatically reconfigure the GCC home environment itself.

Where Oil-Rich Nations Are Placing Their Bets

Summary.

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