OECD BUSINESS AND FINANCE OUTLOOK 2016

KEY FINDINGS9 June 2016 – Paris, FranceAdrian Blundell-WignallSpecial Advisor to the Secretary-General on Financial Markets and Director of Financial and Enterprise Affairs, OECD

Doing business in a fragmented world 7 years after the global financial crisis: Banks recapitalised & monetary

policy remains highly supportive But the global environment is not supportive: EMEs such as China have

struggled with the reversal of the commodity “supercycle” that sustained the earlier boom & created excess capacity.

Result: A failure of the business sector to respond with new investment & restructuring needed to generate jobs & the productivity growth that can support rising incomes & employment

These are essential for inclusive growth if we are to address challenges like climate change & rising wealth inequality.

So what is blocking business investment & productivity growth? The 2016 OECD Business and Finance Outlook includes many

contributions that we can summarise under the theme of “fragmentation”: the heterogeneous policies, rules, laws & industry practices that create perverse incentives & block business efficiency & productivity growth.

Excess capacity: ROE vs Cost of Capital and vs Cost of Equity in advanced and emerging economies

Global capital expenditure by sector, 2002-2015

The evolution of selected financial prices (the grey line is the return based on 100 years of data)

Corporate bond issuance and declining quality, 2000-2015

Capital expenditure and corporate finance: Advanced economies could expand CAPEX by 60% by reducing dividends and buybacks

Company productivity levels and growth rates, pre-crisis versus post-crisis

Debt-to-capital ratios and free cash flow per employee in advanced economy companies, pre-crisis versus post-crisis

Characteristics of companies that transitioned to fast productivity growth after the crisis

R&D - openness to ideas, fiscal incentives M&A - restructuring low cost Authority

cooperation & approval process Equity vs debt - tax, “dark” vs. “lit” exchanges,

trust Free cash flow - open trade, open domestic

markets, tax, flexible labour contracts

Fiscal incentives for R&D need to be well targeted R&D a key driver of companies that transitioned to

rapid productivity growth in the face of the crisis—fiscal incentives are a key policy option.

Supporting tax policies (e.g. credits against income, accelerated or enhanced depreciation, etc.) need to be well targeted at specific impediments to R&D, or they may have no effect or be counterproductive.

Harmful tax practices can be avoided with a “nexus” approach—the taxpayer benefiting from the policy regime must have incurred the expenditure that gave rise to R&D income.

An illustration of the distribution of trading among venues and between lit and dark volume in France, Germany and the UKDecember 2015 - March 2016

Change in equity mix in wind energy projects in Europe, 2010 and 2015

Difference in life expectancy at age 65 by level of education relative to the population average

Foreign Bribery: fragmentation & the profitability of bribes Legal principle: Crime should not pay. But it does, and

the Unaoil and Panama Papers bring home just how prevalent it is.

Penalties vary widely amongst adherents to the Anti-Bribery Convention. And even strong penalties on paper are not necessarily enforced. This strong fragmentation of incentives across 41 adherents to the Convention is problematic.

Simulations based on real world data show that, even in the case of 100% chance of detection, companies would still be willing to invest in a bribery scheme as the penalties are just too low.

Bribery and corruption steals the future of our children in many ways.

Investment treaties: Companies, shareholders and creditors 3000 different investment treaties - this patchwork

fragmentation may set up incentives and mechanisms that modify corporate governance.

“Reflective losses” - Shareholders covered by treaties may claim for damages due to government breaches of treaties.

The ‘rules’ can provide greater rights to foreign covered shareholders vs domestic shareholders. Corporate governance can be fragmented by shifting

power away from the Board to covered shareholders. Foreign shareholders may even stand in front of creditors.

This can lead to complex structuring of investment through multi-tiered corporate structures—to take advantage of different treaties.

Thank you

Find the OECD Business and Finance Outlook online

www.oecd.org/finance/oecd-business-finance-outlook.htm