Frontier investments refer to investing in frontier economies that are low-income but high-growth, such as Myanmar, Mozambique and Rwanda. Although they seem risky, frontier investments provide valuable business opportunities for companies seeking double-digit growth. There are 4 types of frontier investment players: Workhorses serving domestic markets, Cluster Builders exporting abroad, Powerbrokers in politically sensitive domestic industries, and Rentiers operating in resource extraction. With the right strategy targeting the right sector, foreign companies can still achieve success despite policy distortions. In the long run, first movers into frontier economies stand to reap better investment returns than late comers.
Workhorses compete conventionally in local markets
Workhorses are small companies selling to domestic consumers in frontier economies. They gain advantage through product differentiation and operational efficiency rather than policy favors. Workhorses hire most of the local workforce across sectors like manufacturing, services, retail and agriculture. For example, Unilever makes and sells detergent locally as a Workhorse in African frontier markets.
Cluster Builders export abroad by clustering locations
Cluster Builders are export-oriented firms concentrated together to form industry clusters, typically as suppliers to global value chains serving developed markets. Clustering allows them to leverage low costs and available skilled labor to compete on price and quality rather than policy favors. For instance, Gap sources its clothing manufacturing to Myanmar as a Cluster Builder.
Powerbrokers operate in politically-sensitive domestic sectors
Powerbrokers serve domestic markets like Workhorses do, but in industries heavily affected by politics such as telecoms, utilities and gasoline distribution. Developed-market equivalents are usually well-regulated but frontier-economy Powerbrokers channel profits to governments and vested interests instead. One example is Symbion Power building power plants across African frontier markets.
Rentiers extract resources based on government concessions
Rentiers are export-focused firms operating in oil, gas, mining etc. under government license rather than open competition. Contract details like taxes and royalties are negotiated with the state. Weak rule of law means such Rentiers often have poor safety and environmental records. An example would be Rio Tinto mining copper and gold at massive scale in Mongolia’s frontier economy.
In conclusion, frontier investments carry higher risks but also higher reward potentials. With careful targeting and positioning, foreign investors can still find growth opportunities left untapped by local players.