Russia’s Untapped Potential: Beyond Hacking

Russia is not an education superpower.  What if it were? This may not be an idle question as the country seeks to bolster its international position–no less under a Trump Administration–and to counteract the perception of either being a state-sponsored hacker or geopolitical bully.

Domestically, Russia’s persistent de-population trend over the past quarter century coincides with a global shift to renewable energy and a structural shift in commodities demand which injects long-term economic pressure on its growth trajectory, regional relationships and social stability.  But there is an opening for the Kremlin to revive foreign investment activities, scientific innovation and elevate Russia’s “soft power” status:  move toward a more open, privately-funded and globally engaged education sector.

Post-Soviet Education Measures

It has been 25 years since the fall of the U.S.S.R.  Based on a 1989 census the former Soviet Union had a literacy rate of nearly 100 per cent in urban areas with 60% of children over 15 years competing secondary school and 8 per cent completing higher education with a degree.  According to the OECD, nearly 52% of high school graduates were enrolled in tertiary education by 1992.  This placed Russia well above OECD averages at the time.  Since then, the introduction of private education models for professional training and K12 schools, and a partial opening to the West following glasnost, has improved Russia’s educational performance further.

Figure 1 summarizes this comparison over the past two decades.

Notably, certain measures–such as adult literacy, primary class sizes, secondary enrollment rates–have not changed much over the past 25 years given their already advanced levels. But other trends–affordability, completion of higher education (rocketing from 8% to 54% among 25-64 year age group between 1992 and 2015) and the number of foreign students at Russian universities (213,347 enrolled, placing Russia as the 6th largest higher education system for international students)–all increased markedly.

Figure 1: Selected Education Measures in Soviet-Era and Modern Russia: 1992 v. 2015

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As a result, Russia is today among the most highly educated countries in the OECD.  Despite a recession beginning in 2015 and Western sanctions following its Crimea adventure, Russia’s economic competitiveness as measured by  the World Economic Forum Global Competitiveness Index improved to 45th position this year and the IMF is forecasting a return to growth in 2017 on the back of increased domestic demand.  Yet ask anyone if they can name any Russian companies with global influence outside of Gazprom and there is likely to be a blank stare.

This translates to education investment and activities as well.  Data compiled in the Global Edunomic Index ranks Russia as 16th out of 49 countries across emerging and frontier economies, which seems far below its potential. This is because the GEI’s latest reading has Russia scoring comparatively high on most education measures but falling behind from a foreign opportunity, policy and risk perspective.

Figure 2 sets out these comparative rankings against affordability (eg. GDP on a purchasing power parity basis) where Russia is highlighted (in yellow) behind Poland, Estonia and the Czech Republic, and has roughly the same ranking as much poorer (but rapidly educated) Vietnam.

Figure 2: GDP Per Capita PPP and Global Edunomic Index (GEI) Rankings

screenshot-2016-12-30-10-18-16                                      Source: 3/1 Global Research

 

Privatization and Investment

Lest there be any doubt, Vladimir Putin does recognize the need for education innovation, private sector solutions and the critical role of education to Russia’s future.  In 2012, Russia’s May decrees focused on raising the standards of living across Russia’s interior regions and highlighted the role educational disparities and the need to improve both the global rankings of universities and students in the provinces. But with a reduction in the current education budget for 2016-17 by 11.5%, falling university enrollments and the impact from Western sanctions, there are already calls to suspend the “privatization” of higher education.

Foreign collaboration and investment can fill the gap.  But how?

I recently completed some work on Russia that looked at potential growth areas using a small sampling (see Figure 3) of where Russia’s own investors and education entrepreneurs are moving.

They include:

In short, private education solutions directed at the professional employment market, more efficient tools to manage schools and students, online test preparation (with angles for Russians studying abroad), and edtech startup support is taking shape in Russia.  Moreover, these education ventures lie primarily outside the state sector and are focused on increasing efficiencies, student access and international collaboration.  Several emerging technology platforms such as Dnevnik.ru are exportable.

Figure 3. Selected Education and Edtech Investments in the Russian Federation

russia-comps

In higher education, Russia is already the 6th largest market for international students with roughly the size of Australia’s international student enrollments.  But more aggressive moves to globalize its universities through joint or branch campuses at home and deeper online collaboration with online providers could bring benefits. Coursera, which currently runs five university partnerships in the country, offers a early test case.

Outside of its borders, Russia already has fair amount of engagement through international branch campuses in Central Asia –according to C-BERT, Russia has 18 international branch campuses of which nine are in Central Asia and one in China but no campuses in Western Europe, the US, Africa or South America–and manages numerous dual degree programs in China based on a history of collaboration beginning with the Chinese Communist Party under Mao Zedong.  But its presence in the US and Europe continues to be limited, and its home universities attract a pittance of Western students.  While China, India and Saudi Arabia accounted for over half of international students studying in the US in 2015, Russia didn’t make the top 25 source countries.

Certain collaborations have already hit self-inflicted problems. Skulkova Moscow School of Management, a private and globally-oriented business school, has created a useful template for international cooperation yet its incubation project with MIT, after a terrific start, was beset by corruption and other issues.  There has been continued collaboration between US and Russian universities despite the past few years of bilateral tensions but also moves to crackdown on “foreign funding” and influence. Perhaps the most benign segment is the K12 level, where international private schools are thriving in large cities such as Moscow and St Petersburg.  As of 2016, there were 28 International Baccalaureate “World Schools” but the increasing demand for students to be “internationally tracked” to pursue higher education studies abroad (including to the US) will most likely reach far beyond this number no matter what the government does (to find a recent comparison, look to China’s recent international K12 policies).

Caveats

There are, of course, important reasons that most foreign investors don’t know or care about Russian opportunities in the education and related technology industries: they fear the IP theft, political risk, anti-foreign bias and corruption that might come with it.  One could do worse than to read Hermitage CEO Bill Browder’s hair-raising memoir Red Notice to see why such fears can be more than justified, even by the most savvy foreign investors in Russia.  As someone who has worked across the most challenging markets for my entire career, I’m not naive to that.  Yet changes are afoot.

I would submit that ventures lying far from the security-state apparatus or strategic industries (energy, telecommunications, defense, banks) could potentially provide an opening for foreign investors if the current pendulum swings and Russia seeks to engage more deeply–economically, financially and culturally–with the rest of the world. A more confident but economically challenged Russia, with renewed US engagement from the private sector, could open the door.

International education and and related technology would be the most obvious place to start.

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China’s Next Act: From Hollywood to Harvard?

This article was published in Edsurge on March 21,2016.

Could China buy America’s top universities? When this question appeared on Quora a few years ago it was quickly dismissed as unworkable from a governance perspective. But the ambition behind the question remains: If Chinese investors could, they would. What else might China acquire from America’s $1.3 trillion education industry if Harvard is out of reach? We are about to find out.

The unlikely parallel is Hollywood. In just the first few weeks of 2016 Chinese conglomerate Wanda Group acquired blockbuster Legendary Entertainment for $3.5 billion following its previous $2.6 billion acquisition of AMC Theaters; China Media Capital injected $100 million into blockbuster Imagine Entertainment, and Perfect World Pictures arranged a $500 million finance deal with Universal Pictures. In the adjacent digital games market Chinese acquisitions are stacked high, including Internet giant Tencent’s investments in Riot Games, Epic Games, a strategic minority stake in Activision Blizzard, and, more recently, established content streaming partnerships with HBO, Warner Brothers and the NBA.

Meanwhile e-commerce leader Alibaba has invested in companies ranging from LA-based Snapchat to startups such as Fanatics (online sports) and Kabam (video games), and more recently in online education company iTutor Group. China’s total M&A activity in the US during 2015 was $14 billion, with an additional $2.3 billion invested directly in startups since 2012, but this is only the beginning for the media and entertainment sector.

What do education and the Hollywood entertainment complex have in common? Despite obvious differences, both are industries where consumer demand is off the charts in China and where creative talent, technology, intellectual property (IP) and innovative content are coveted. Both are being disrupted by digital delivery models and adjacent competitors. Both operate in global markets where “Made in America” matters.

To date, US and UK education-related businesses have received a paltry $350 million in investment from China and other regional investors, based on our estimates. But there are strategic and financial reasons why China’s investment into US education will accelerate.

USChinapeg

First, intensifying competition within China’s domestic education sector is creating acute needs to differentiate by using unique foreign content, services and technology. The latest example is TAL Education’s investment in Knewton following an earlier investment in the Minerva Project, a type of alliance that not only offers China exposure to advanced technologies and innovative US education brands, but also signals to local consumers a superior level of quality and prestige.

Second, China’s internal educational reforms are driving consumer choice. Specifically, changes in the national gaokao and zhongkao exams, experimental admission standards at selected universities, and the internationalization of higher education pathways are fueling explosive demand for international schools in China and boarding schools abroad. A growing emphasis on early-age English immersion programs and extracurricular experiences also makes U.S.-based companies attractive partners.

Third, Chinese companies are looking to continue serving Chinese students even if they study overseas. Thus far, Chinese students are studying in both U.S. colleges and higher schools at record levels. Yet Chinese competitors, such as Universities and service providers, are largely absent in the U.S. In 2015, there were 304,000 Chinese students in U.S. higher education and 34,758 students in U.S. K-12 system, the latter growing 290% in a single year. According to the National Association of Foreign Student Advisers, international students overall contributed roughly $30.5 billion of economic value in 2015; a simple extrapolation, based on Chinese students as a percentage of total international students in the U.S., puts China’s contribution at over $10 billion annually. Yet despite such a large potential revenue base, there is a dearth of Chinese investment into US-based pathways, tutoring, boarding school and service businesses.

Fourth, from an American perspective a potential Chinese investor can provide access to its own deep market and a built-in platform for product distribution and student access. Many U.S.-based education and edtech companies simply do not have the networks, knowledge and resources to execute a meaningful China strategy, despite a scattershot of loose cooperative partnerships in emerging markets of questionable value and depth. With U.S. education markets offering limited scale compared to emerging economies, the case for venture and private equity-backed firms, from K-12 tutoring to proprietary vocational colleges, to search for more investment-intensive Chinese partnerships—including partial sales or buyouts—grows stronger.

Fifth, China itself is an emerging edtech market with an impressive lineup of mobile, e-commerce and media competitors, from well-known conglomerates mentioned above to new ventures such as NetDragon Education, iTutorGroup, and 17zuoye. Last year marked a high point of early-stage capital raises in China, amounting to $317 million in the first half of 2015 and placing China on a globally competitive level. Furthermore, many of these firms are cash rich, acquisitive, and innovative. For some, the added benefit of diversifying away from Renminbi (the Chinese currency) denominated revenues and risk—and possibly increasing their public valuations at home—provides a further nudge.

Industry after industry in China has struggled with intensifying domestic competition, a push toward innovation, exacting consumer demands, and the extension of their businesses abroad.

In the U.S., total Chinese investment now exceeds $50 billion and could reach $200 billion by the end of the decade. The question is not whether a critical mass of Chinese investment will enter America’s vaunted education sector, but when it will arrive. From U.S. education entrepreneurs to college leaders to venerable US education brands in need of a remake, Chinese capital, and the potential market access it can provide, may soon be coming to a classroom near you.

 

Central Asia’s New Silk Road: Game Changers

“No need to listen for the fall. This is the World’s end.” — Rudyard Kipling, Kim

During a long, cold flight to Almaty in the late 1990s I sat sleepless reading Peter Hopkirk’s landmark history of the region, “The Great Game: The Struggle for Empire in Central Asia.”  My colleagues and I were about to spend the week meeting with Kazakhstan’s Ministry of Energy as well as its largest companies, all heavily armed by private security guards touting AK-47s while discussing their IPO plans in London. That alone was an eye-opener even Hopkirk would have missed. But what was unique about this trip was our informal mission, backed by the Chinese government, of introducing the idea of a vast pipeline in Kazakhstan that would reach from China’s far western Xinjiang region to the Caspian Sea. The Kazakhs at the time, fearing rather engaging China, were having none of it.

Fast forward to China’s “One Belt, One Road” initiative launched amidst much fanfare this year and not coincidentally in tandem with its sponsorship of the Asian Infrastructure Investment Bank (AIIB).   If successful, these two moves promise to have a geo-economic impact on par with China’s immensely ambitious development policy toward Africa. However unlike Africa, China’s focus on driving a renewed “New Silk Road” through Central Asia faces an already crowded field of post-colonial (and post-Soviet) military interests, natural resource competition, a resurgent and irredentist Russia, and a potential threat of IS terrorism in the region.

What is more, despite its natural wealth and historical location as a crossroads, Central Asia remains stunted by income inequality and lack of advanced educational attainment–two areas, I would argue, which hold the key to the Great Game.  This is because the success of any New Silk Road will likely require far more than the odd gas pipeline or wad of investment dollars but rather a level of development that enhances economic inclusion and can foster political and social stability, open borders, and diversified economic growth. In this sense, a single aspect of Central Asia which has been largely discounted must now be confronted: the education of its people.

Central Asia by the Numbers

To the uninitiated, the traditional concept of Central Asia is comprised of the five countries of Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and Turkmenistan.  I’ve included Afghanistan in our analysis since it borders on three Central Asian republics and injects its own development challenges onto the region, whether they like it or not. As a failed education state, Afghanistan also serves as warning to the region about what an alternative path might look like.

Table 1 summarizes aggregate economic and education data for the Central Asian republics, centered on long-term indicators:

  • Total population of approximately 66 million people (and close to 100 million if we include Afghanistan)
  • A sizable 52.6 million people projected to be of working age (15-64 years) by 2030
  • FDI inflows of US$14.8 billion in 2013 or about half of India’s $35 billion FDI in 2014.
  • Relatively high per capita GDP (in PPP measures) of US$10,307 ($8,914 if we include Afghanistan)
  • Gini coefficients reflecting income inequality at moderate to high levels, ranging from a low of 29 for Kazakhstan to a high of  36.7 for Uzbekistan (but still lower than US levels of 40).
  • Wide variation of educational attainment and labor skills, ranging from OECD levels to rates far below India and China, but overall, lagging.

Figure 2: Comparative Economic and Education Data:  Central Asia and Afghanistan

OMore recently, and to add further urgency to what is a region in transition to emerging market status, Central Asia has fallen victim to collapsing oil prices, aborted resource investments, and economic weakness in Russia (which provides remittances and is the main export market for the region).  Under these conditions, it would be folly to believe that massive hydrocarbon projects alone will galvanize economic development without a level of education that acts as both an economic stabilizer and a key to social change, not least, to root out corruption based on resource extraction and control.

Where, then, is Central Asia heading in terms of educating its populations and what are the challenges ahead?

Early Success at Primary School Levels

Central Asia’s republics are relatively well educated at early ages. Universal primary school completion—a key indicator of future educational attainment—was reached or exceeded in most countries by 2012 and many were closing in on this goal in 2000 (see Figure 2). By comparison, Afghanistan is a failed education state with a paltry 34 and 38 per cent of children competing primary school in 2000 and 2012, respectively, not least due to the exclusion of girls.  According to one wide-ranging report on Afghanistan’s educational system in the 20th century, the number of students enrolled in 2000 barely exceeded levels achieved in 1978 and, even more distressing, remained far below the enrollments levels in the country during the more peaceful 1960s and 1970s.  Beyond Afghanistan, Pakistan and Bangladesh also face deep challenges, where only 72 and 75 per cent of children finished primary school in 2012.

In comparative terms, this illustrates that Central Asia is not the educational wasteland often thought of in popular imagination and should provide some solace to future policymakers and investors.

Figure 2: Primary Education Completion Rates by Country, 2000 v 2012

Declining Fertility Rates Put Less Pressure on Educational Systems

Supporting this early age education trend is a sharp decline in fertility rates. As I have noted in previous research, it is axiomatic that declining population pressures and less stress on educational systems can improve educational outcomes.  One study by the British Council has underscored the correlation between standardized test scores and falling birth rates in East Asia, a finding that can apply to other regions as well.

In Central Asia, Kazakhstan has maintained a consistently low fertility rate (as measured by birthrates per woman) of 2.7 times since 1990 which contributes to the fact that its educational outcomes are the highest in the region. More important are its “high-birth” neighbors which have reduced average births dramatically:  Uzbekistan, showing a declining fertility rate from 4.1 in 1990 to 2.5 in 2012; Tajikistan falling from 5.2 to 3.8, and Turkmenistan from 4.3 to to 2.4 births per woman. Contrast this with Afghanistan, which had 7.7 births per woman in 1990, reducing to an improved but still high 5.1 by 2012 (see Figure 3).

Directionally, the five Central Asian republics are primed for positive education outcomes for the simple reason that fewer children to educate equates to more potential support per child–financial, pedagogic or otherwise–and higher potential attainment beyond primary levels.

Figure 3: Total Fertility Rates: Birthrates per Woman by Country, 1990 v. 2012

Gradual Moves to Higher Education Attainment, But Uneven Success

With higher numbers of primary school graduates and lower stress on the student pipeline through moderating population size, we can expect a trend toward longer student engagement cycles and higher educational attainment through University if both capacity and affordability are sufficient.

Thus far we can see gradual improvements in Central Asia together with other, more depressing trends in tertiary enrollment rates. As Figure 4 indicates, Kazakhstan grew enrollments rapidly from 2001 to 2006 (at peak close to 790,000 students), but declined through 2010.  The country’s tertiary gross enrollment rate (GER) of 48.5 per cent in 2013 is largely in line with OECD averages and far higher than China and India, although its population size is vastly different.  Kyrgyzstan and Tajikistan are two other countries that have registered some moderate growth in tertiary enrollments. Kyrgistan is a particularly high GER of 47.2 per cent, with Tajikistan with a much lower (tough still relatively impressive) 25.4 per cent.

Uzbekistan and Turkmenistan are more problematic, with low GERs (8.9 and an estimated 8.0 per cent, respectively) and declining tertiary enrollments in the case of Uzbekistan (note that Turkmenistan does not report tertiary enrollments–never a good sign).  Moreover, Uzbekistan reported high secondary enrollment completion suggesting that a lack of capacity may be severely limiting student attainment in the country.

Figure 4: Tertiary Enrollments by Country, 2001-2012

International Mobility and Engagement Is Plugging the Capacity Gap

As in many other parts of Asia, the lack of domestic higher education capacity coupled with higher attainment levels, greater affordability and increased savings has traditionally propelled the movement of students abroad to destinations such as the UK, Australia and the US, and this is happening for Central Asian students as well, although most end up in Russia or non-Western University systems.

As Figure 5 illustrates, several Central Asian countries have increased the size of their tertiary student cohorts overseas.  Three countries are worth mentioning: Kazakhstan, which almost doubled its student abroad cohort to reach almost 44,000 annually by 2012; Tajikistan, with international students rising from 1,337 in 2001 to 9,128 in 2012; and Turkmenistan, which since 2007 has rocketed to a level of 27,959 students by 2012.

In 2014, a combined 3,203 students from Central Asia were studying at US colleges and Universities, a level however which is comparatively low and far less than even Nepal, which sent 8,155 students. Kazakhstan sent 2,102 students to the US in 2014 out of an estimated total of 44,000 students (using its 2012 data), or a mere 4.8 per cent of total.

Clearly US higher education is only a bit player in Central Asia–compared with Russia and to an increasing extent China–with significant scope for growth and engagement. Consider that out of thirteen international branch campuses in the region, all but two are hosted by Russian Universities; in Kazakhstan, all international branch campuses are Russian.  The US is seeking to remedy this strategic deficit–most recently through the launch of the American University of Central Asia and other government-led initiatives–but far more educational engagement is needed to build the level of educational capacity, and quality, that can serves the region’s future interests.

Figure 5: International Mobile (Offshore) Enrollments by Country, 2001-2012

Education Spending to Accelerate with Regional Growth

Finally, there is no reason to believe that Central Asian households will act any differently from the rest of Asia as their wealth increases and opportunities for educating their children unfold. The propensity for emerging Asia, including its poorest regions of South Asia and Myanmar, to spend a significant proportion of household income on supplemental education is well established, and an area I previously analyzed in the case of both poor and rich students in emerging economies.  

At present, two countries–Kazakhstan and Turkmenistan–are posting significant increases in GDP per capita (as measured in PPP) and at levels far above averages within Developing Asia. However the remaining populations of Uzbekistan, Kyrgyzstan, and Tajikistan lie beneath the $4,000 to 5,000 PPP “middle class” threshold and are growing from a much lower base. Differing levels of affordability will demand a more nuanced approach to the region as a whole.

Figure 6 illustrates these changes in affordability through the relative strong economic cycle ending 2013.

                 Figure 6: GDP Per Capita at PPP (Current International Dollars), 2001-13

In sum, educational and economic progress within Central Asia will not be easy but the region has a decent foundation base from primary school levels.  Country profiles differ widely, with Kazakhstan leading across many statistical indicators, including access to higher education and affordability.  The region’s reliance on Russia is unstable, if not problematic, in terms of educational needs and priorities.  Chinese investment may help to galvanize a region in need but not if it relies solely on large scale infrastructure projects.

The clock is ticking on economic and social stability in a region propped up by resources rather than human capital. Investors and policymakers who plan to travel along this New Silk Road should take note.

Edunomics Focus: Pushing into Asia's Education Frontier

With so many emerging market economies and currencies on the boil, it might be counter-intuitive to explore investing in markets that are even less developed. But in the realm of education, there are increasingly compelling reasons to do so.

Within Asia, so-called Frontier Markets began as a classification for financial portfolio investors and the indices that track investable assets in these countries. Although the boundaries are not uniformly agreed, countries on the frontier often exhibit higher GDP growth trajectories than emerging and developed economies due to favorable and young demographics, low economic bases, technological application with high initial impact, accelerating urbanization trends, and, importantly, steep literacy and education trajectories.

Indeed, education appears to be a key catalyst for countries to move from frontier to emerging market status. This brief survey suggests that Asia’s frontier markets can offer well defined early-stage growth opportunities across the entire student cycle, from pre-K to corporate training.  Yet understanding the complexity of these markets is critical, and not for the faint of heart.

Where is the Frontier?

In defining the frontier within Asia, we have selected nine countries for comparative analysis, four of which are included in one or both of the FTSE and MSCI indices—Bangladesh, Pakistan, Sri Lanka and Vietnam—and an additional three—Mongolia, Myanmar, and Nepal–which we think merit inclusion as potentially attractive education markets for interested investors, education providers and stakeholders.

Figure 1 provides a basic comparison of economic and growth indicators by country, together with references to key education demographics. This much is clear: these countries represent a sizable and dynamic part of the Asian economic landscape including above-average GDP growth, young populations, varying affordability thresholds towards “middle class” levels, and targeted foreign direct investment.

Specifically:

  • Youthful populations of 540 million in aggregate, with a range of 23% to 34% under the age of 15 years.
  • Projected 165 million students in the higher education pipeline–between the ages of 15 to 19 years–by 2030.
  • Average GDP per capita in PPP terms of $6,163, which represents a threshold level for middle class growth in demand.
  • Increasing, but by no means adequate female access and completion rates through high school.
  • Rapid early increases in internationally mobile students in Vietnam, Pakistan and Nepal based on both higher educational attainment and lack of educational supply and quality
  • Deepening technology application to learning at all stages.

But the counter-narrative is that education quality and provision is nowhere near sufficient to accommodate bulging populations under the age of 15 years and prepare them for future work. There are acute supply constraints of schools, universities and teachers both today and far into the future. Hence if dramatic solutions, innovations and education investment are not found soon in many of these frontier markets, then a demographic disaster awaits rather than demographic dividend.

 Figure 1: Comparative Economic and Education Data by Selected Country

Asia’s stark education imperatives

Six measures can help to fill in the details.

First, universal primary school completion—a key indicator of future educational attainment—was reached or exceeded in most countries by 2012 with the exception of Pakistan and Bangladesh (see Figure 2). Despite some effort, only 72 and 75 per cent of children finished primary school in Pakistan and Bangladesh in 2012, a level that puts these two countries at least one to two decades behind their peers and is likely to haunt policymakers for the foreseeable future.

 

At the high end of the spectrum, Vietnam has been far ahead of both Southeast Asian and other frontier neighbors, dating back to 2000 when over 97.8 per cent of children had already completed at primary levels. It is therefore no surprise that Vietnamese students have rapidly moved toward higher levels of academic achievement after primary school. As we will see later, the result has also put acute pressure on expectations for world-class educational quality, the willingness of households to invest in their children’s future outside of formal schooling, and high labor productivity.

Following behind Vietnam are Myanmar and Nepal, both of which rose dramatically to primary completion levels of 95 and 101 per cent, respectively, in 2012. Sri Lanka has maintained near universal primary completion since 2000 as has Mongolia, the latter benefiting from relatively low population demographics.  These developments have pushed education pipelines toward higher education demand and beyond the most basic needs.

Figure 2: Primary Completion as % Total Relevant Age Population, 2000 and 2012

Second, it is axiomatic that declining population pressures and less stress on educational systems can improve educational outcomes.  To some extent the inverse may help to explain the lagging results from Pakistan and Bangladesh at the primary level–and a higher level in Sri Lanka–but is goes further. A study by the British Council has underscored the correlation between standardized test scores and falling birth rates in East Asia, a finding that may be even more relevant to Asian frontier markets where population sizes are considerably larger.

Consider that Pakistan’s birth rate per household has dropped from 6 in 1990 to 3.3 in 2012; Nepal from 5.2 to 2.4; and Bangladesh from 4.6 to 2.2 over the same period (see Figure 3). Vietnamese birth rates have dropped from 3.6 per household in 1990 to 1.8 per household by 2012. As a result, the majority of birth rates in Asian frontier markets have declined by over 50 per cent level in a single generation.

Directionally, this is positive for the simple reason that fewer children to educate equates to more potential support per child–financial, pedagogic or otherwise–and higher potential attainment beyond primary levels for these countries.

Figure 3: Changes in Birth Rates Per Household, 1990 v 2012

The third observation flows from the previous two: that is, observable trends toward longer student engagement cycles and higher educational attainment.  We can see this at work in Figure 4, but the results are mixed. Vietnam, Pakistan and Bangladesh have experienced dramatic gains in tertiary enrollments to date, yet relative enrollment rates differ.  For example, Vietnam reported a 24.3 per cent tertiary gross enrollment rate (GER) in 2012 which is about half of OECD levels but on par with China. There were lower GERs of 9.5 and 13.2 per cent observed for Pakistan and Bangladesh despite higher absolute student numbers, a function of lower secondary completion rates and limited university and other tertiary options.

Notably, Vietnam’s higher education or tertiary enrollments increased from less than 700,000 in 2001 to over 2.2 million in 2013, with a significant amount of runway ahead.  This enrollment level is now on par with Thailand whose tertiary enrollments peaked in 2007 despite being almost 3 times as wealthy on a PPP per capita basis than Vietnam (US$14,393 v US$5,294, respectively, based on World Bank estimates).

Elsewhere, enrollments in Myanmar and Nepal have grown incrementally from a small base but remain a fraction of Vietnam’s participation at the college level. To cite one example, for all the noise around the opening of Myanmar, the country’s tertiary students numbered approximately 666,000 in 2013 and any future “take off” timing is difficult to predict, although certainly not in doubt as the country begins to open to the outside world.

 Figure 4: Tertiary Enrollments by Selected Country, 2001-2013

Fourth, the lack of domestic higher education capacity coupled with higher attainment levels, greater affordability and increased savings has traditionally propelled the movement of Asian students abroad to destinations such as the UK, Australia and the US.

As Figure 5 illustrates, Asia’s frontier markets have all been increasing their share of students going abroad.  Three countries stand out: Vietnam, where student abroad levels have risen by 5 times since 2000; and Pakistan and Nepal, where outbound enrollment levels have tripled.

In the US alone, Vietnam’s dramatic rise in study abroad has risen from 9,851 students in 2001  to 16,579 in 2013, the eighth largest contributing source for international students. Over 11,500 students were enrolled in Australia that year.  Since affordability matters greatly to offshore study trends, we can expect more frontier countries such as Myanmar, Mongolia and Sri Lanka to increase their share as income levels rise.

Figure 5: Offshore International Student Enrollments by Country, 2001-2012

Fifth, with fewer births and greater chance to educate a larger proportion of the population, labor productivity will benefit significantly.

At the leading edge of the frontier, Vietnam has consistently registered among the highest growth in labor productivity in Asia over the past two decades, averaging 5.0% per year between 1990 and 2000 and 4.8 per cent from 2000 to 2012, according to APO data in Figure 6 (which measures productivity using annual GDP growth at constant basic prices per hour).

This level of sustained labor productivity correlates to educational levels: only China/Korea (1990-2000) and China/India (2000-2011) exceed average Vietnamese growth levels over this time period. Further down the list in Asia, countries such as Sri Lanka have started to show stronger productivity since 2005 while others, such as Pakistan and Bangladesh, lag far behind the productivity rates in nearby (and better educated) India. Only improved education is likely to tip the balance.

Figure 6: Labor Productivity Growth: GDP at constant prices per hour, 2005 PPP data

Source: APO Productivity Database, 2014. Source: APO Productivity Database, 2014.

Sixth, the propensity for emerging Asia to spend a significant proportion of household income on supplemental education is well established, as I previously analyzed in the case of both poor and rich students in emerging economies.  

Increasing GDP per capita in Asia’s frontier markets will only diversify and deepen student expenditure further, with Sri Lanka, Vietnam, Mongolia, and Pakistan exceeding the $4,000 PPP “middle class” threshold (see Figure 7) and Myanmar close behind. As such, the catch-up phase with more developed Asian markets is only just beginning, with the entire education ecosystem–from supplemental tutoring to English to degrees–to be driven by consumer-facing demand.

Figure 7: GDP per Capita at Purchasing Power Parity (PPP) levels, 2000-2013

In sum, these measures of educational and economic progress for Asia’s frontier countries provide a broad map of emerging opportunities across the student spectrum, with varying levels of risk-return for education providers and investors.

In a perfect world, with Singapore-like efficiency and relatively tame population sizes, public sector solutions could suffice. But Asia’s frontier, and its stark educational imperative, is far from ideal.  What is needed are immense levels of private capital, innovative models of delivery, local entrepreneurial talent dedicated to managing the quality and scale of student outcomes, and corporate activity to meld learning to workforce needs. A deeper engagement from foreign education companies, universities, global start-ups and technology platforms is calling.

Where are Asian Households Spending Their Money? (Hint: Education)

By 2030 Asia’s emerging middle class is expected to account for over 60 per cent of total world spending and, if past history is any guide, a significant part of family budgets will be spent on education.  But what exactly?

A recent survey by MasterCard profiled 16 markets in the Asia-Pacific over 2012-13 and asked families how they are prioritizing their education and child “enrichment” spending.  Summary findings are as follows:

  • Just over two thirds of Asia/Pacific consumers save regularly for their children’s education and on average, this takes up 14% of their monthly household income. The highest market is Myanmar at 18%; the lowest is New Zealand with 8%.
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  • More than two thirds of households in Asia/Pacific spend on enrichment classes: the majority of children in China and South Korea are enrolled in learning a foreign language, while markets such as Australia, New Zealand and the Philippines place more emphasis on sports.
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  • More than half of parents in India (54%), Taiwan (52%) and Thailand (52%) are spending on extra tuition classes for their children, closely followed by Malaysia (46%), Singapore (45%) and Bangladesh (45%). Chinese (53%) and Korean (50%) households were more inclined towards foreign language classes. More than 50% of respondents from Hong Kong preferred their children to learn a musical instrument.
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  • Overall, a third of Asia/Pacific consumers intend to take up an educational course in the next year – highest in China (53%), South Korea (50%), Malaysia (44%), Thailand (43%), Hong Kong (41%), and Singapore (38%), and lowest in India (8%), Indonesia (12%), Japan (14%) and Vietnam (16%).

I have taken the raw data and set out two comparative charts below, concentrating on the three the most popular categories:  Tuition (Academic), Foreign Languages and Sport.

First, we see the differences across the region between tuition and language spending, which also correlates to high propensity to international students studying abroad in English speaking countries.  Korea, China and Hong Kong are obvious examples.

Household Education Spending Priorities I: Asia-Pacific Survey Data (% of Families)

Second, we can see how academic tuition spending correlates (or not) with sports.  For example, while Indian families spend predominantly on tuition a more developed country such as Australia spends mainly on sports and related enrichment activities.

The broader implications are that Asia is a two-tiered education market in terms of spending, which should not be surprising given the vastly different economies within the region.  Overall we can expect that emerging middle classes will spend as much as they can on assuring basic quality education by paying extra tuition or enrolling in private schools when they can.  Once that is secure, and as we move up the income ladder, the priority for English language (think: jobs in service sector, higher education abroad) becomes more critical as a percentage of the family budget.  Finally it suggests that Asia offers a highly diverse set of entry points for investors, educational institutions and private education providers in a region that – at the average household level – is in the midst of dramatic spending increases.

 

What Multinationals Can Teach Universities Expanding into Emerging Markets

Universities have been around for centuries, and for good reason: they move glacially, if at all. If you were look at a list of the leading American companies in 1920 and try to determine how many have survived to the present day, that number could be counted on both hands. This is not the case for Universities. They have managed to thrive for decades, particularly in the post-WWII period, by operating within insulated and tax-subsidized markets whilst enjoying maximum pricing power, consistently growing demand and unquestioning belief in their value proposition. But that era is coming to a end. 

As with many US corporations before them, educational institutions are now facing a wave of disruptive technologies and competitors and have been scrambling to enter Emerging Asia in search of international revenues and a more globally applicable education product.  Their progression overseas began with the usual cycles of “exports” and exchange of education to joint cooperative ventures and now to more direct, capital intensive ground operations.  The results to date from this more muscular expansion have been sobering, with many Universities acting without a sound business strategy (or even think they need one), an understanding of their target student market, and a set of guiding principles that many of the most successful multinational corporations–humbled after years of their own setbacks–now employ.  As such we can reasonably predict that many Universities will continue to stumble in Asia if they refuse to take heed of these lessons or, even worse, believe that their special status as Universities (non-profit, research-driven) allows them to play by different rules.   

Separating Winners from Losers

To understand why this is the case, consider some background. Temple University in Tokyo, which has been in Japan for over 30 years despite its ups and downs financially, is the only University remaining out of the 40 American colleges that set up in Japan during the 1980s, an astonishingly low survival rate.  We are now in phase two.  By 2012 there were 200 branch campusesoperated mainly by parent institutions in the US, United Kingdom and Australia. The UAE led the world by hosting 39 branch campuses, but the overall number of branch campuses are predominantly in Asia and targeting Asian students in China, India and Southeast Asia.  This does not include the thousands of less-intensive, cooperative agreements and exchange programs existing in Asia and, most conspiciously, in China.  As I have written previously (see here and here), the Asia education opportunity is immensely attractive to Universities and other education providers from the US and elsewhere so it is no surprise that Universities are going deep into Asia with more substantial investment ideas and strategies. 

A recent sampling is set out in the table below.  It  includes a few prominent branch campus and partnership examples for Asia and the Gulf, listing both successes and failures ranging from high-profile investments which were dead on arrival, such as NYU in Singapore, to successful branch campuses set up by Australian institutions, RMIT Vietnam and Monash Malaysia, that continue to expand. 

Selected University Partnerships/Investments in Asia and the Gulf

Source: Various reports; Sinica Advisors LLC

As the table illustrates, there have been a number of failed entry strategies in the past few years.  But failed ventures and expansion challenges are nothing new for Universities entering Asia. Back in 2007, the British research group Agora exhorted Universities to take off their rose tinted spectacles when looking atestablishing campuses in China, spotlighting challengs such as governance, regulation and shareholder disputes. In a more recent article, ICEF summarizeda few new cases including NYU Tisch Asia, which is being aborted due to financial pressures based on a flawed business model; University of Waterloo, low enrolments and misalignment with Dubai partner; and York University School of Business, with unrealistic regulatory assumptions in India. The list goes on.  What is striking though is that the failures or persistent difficulties amongst many Universities are typical to the corporate sector, and that the oft-cited remedies–quality control, business model, regulations, local market knowledge–are something akin to Emerging Markets for Dummies. The real question is whether Universities, assuming they have the resources necessary and a differentiated brand, can plan and execute effectively. 

Here are few areas where they can compare notes with multinationals operating in Asia.

Aligning Partnership Goals that are Realistic and Durable

Mismanaging local stakeholders has been a graveyard for many promising joint ventures and other investment structures in Asia.  Agreeing with counterparts on tangible objectives at the start, and actually expecting that such goals will change over time (sometimes dramatically) should be factored in early. Of course, this is by no means easy to do. McKinsey cites four separate life insurance joint ventures in China which failed within a year as a result of shareholder disputes, a lack of collective planning, and different expectations, or, as the Chinese would say, sleeping in the same bed with different dreams. Other notable failures in China include EBay and Yahoo in the internet sector, two companies which rushed hastily into the market and assumed that their partners thought the same way they did. Conversely a number of multinationals have built durable ventures, such as GM and SAB Miller in China or Hindustan Level in India. They did so by aligning interests with local partners, communicating with them clearly and consistently, and managing these interests over time, at significant cost, and no matter how great the difficulty.

For Universities, the goals of branch campuses and investments are often quite clear–access to local student enrolments and revenue, exchange opportunities for students back home, enhanced global research and curriculum capabilities in professional disciplines. But local partners, whether local government or investors, may have different concepts about the future. They are often at different stages of development, do not have a global brand, or a century of historical operations. Local partners may have more aggressive growth expectations; emphasis on curriculum to promote certain government or community objectives; different admission standards; and an interest in pursuing other partnerships that might actually compete with their other partners.  Partner due diligence is another issue.  As George Mason University learned in Dubai, local partners that underwrite the financially sustainability of the venture campus may be unstable themselves and need to pull the plug. Duke University, with the Kunshan municipal government in China as its direct partner, continues to face delays and serious questions arise as to their choice of partner and local execution team for such an ambitious project, slated at $260 million for the campus construction alone.  The lesson here is not only to know your partner wellbut to work on communicating objectives and incentives constantly, and thoroughly, from inception through the life of the partnership.  Which brings us to a related issue:  financial returns.

Sticking to Rigorous Financial Return and Sustainability Metrics

In the 1990s, at the start of multinational investment frenzy in emerging markets, there was a widespread belief among corporate executives and their Boards that China was somehow different and that their operations did not have to be profitable in the short-term.  This encouraged many companies that had a weak business strategies but strong faith in market demographics (“China is an enormous market!) to make ill-advised decisions which lead many to failure. By the end of the decade this problem was summed up by Rick Yan in an article entitled “Short-term Results: the Litmus Test for Success in China.”   

Universities are no exception. While it is clear that metrics used by Coca Cola or Otis Elevator to measure success are not usually those used by Universities–most of whom are non-profit, research-focused, and interested in enhancing academic reputation and ranking rather than quarterly growth in earnings–it is wrong to think that profitability (or surplus), short and long-term, should not be a factor in expanding higher education operations. Local stakeholders, private and government, are often interested in expanding their own prestige and market position, and foreign Universities that start modestly should be prepared that expansion pressures will build.  Moreover, market demand and regulatory conditions can and will change, impacting enrolments and tuition pricing during the initial years and beyond. Competition will require greater marketing expense than first anticipated. Necessary resources and costs may be much higher than estimated. All of these factors suggest that crafting a branch campus or other joint venture strategy should have adequate margin for error and early surplus of operating capital in order to sustain growth and operations.

A glaring example of this occured in 2008 when NYU set up its new Arts campus in Singapore. Initially expected to provide MFA degrees to Asia-based students at NYU tuition rates, less than three years later the campus announced it was set to close due to financial pressures with a reported $6m deficit by 2009 and despite offers of a loan subsidy from the Singapore Development Board.  It is not only that NYU severely misjudged its target market based on its product offering (more on this in the next section), but also that its financial assumptions were operating on a razor’s edge in terms of what initial enrolments were necessary to offset the cost of flying in faculty and operating expensive infrastructure. Again, financial surpluses matter.

Gaining a Deep Understanding of Market, Price and Micro Analytics

Corporate strategies in emerging Asia have been driven by excellent on-ground research, primary market surveys, and data analytics, though obviously we cannot expect that Texas A&M will have a marketing effort rivaling Starbucks or Disney. Emerging markets in Asia are extremely fluid and fast-moving, and this includes education where student preferences, curriculum interest, affordability, local currencies, tuition pricing and competitive local education offerings are always in play. As multinationals in Asia know all too well, ignoring local competitors, know matter how large your perceived advantage, is also dangerous. As Yale President Richard Levin has previously noted (see here), Asia’s Universities are well on their way to competiting globally at both the elite and mass-market levels, where even the vaunted American advantage in research is shrinking. 

Leading multinationals in Asia, both foreign and local, understand the need to be proximate to the market. I know through my own experience advising the world’s top multinationals and Universities that while corporations conduct constant, detailed market studies that inform their decision-making all the way to the Board, Universities usually look at macro indicators (top-line enrolment figures, country selection, gross enrolment ratios, anecdotal interest) and skip the more relevant psychometric, pricing and primary market research surveys that match their specific offerings with local students. By basing an expensive, multi-year expansion into emerging Asia on macro data alone, or even worse through a simple conviction that a large market will float everyone, Universities are creating a development and investment process that is fraught with unnecessary risk. Which brings us to regulation.

Pro-actively Managing Regulators and Officials

Education is a highly regulated industry; we know that. But it presents a number of challenges for investing in developing markets where regulatory risks in the form of local implementation, lack of legal clarity and sudden changes are often normal occurrences.  Multinational corporations entering so-called “strategic” industries in areas such as telecommunications, oil and gas, media, and aerospace have had mixed and at times disastrous results to date. However one thing they agree on is a strategy of “GR” or government relations that is persisent and well-resourced.  Pro-active management or lobbying may be a necessary but not sufficient condition for success, as Rupert Murdoch found after more than a decade of trying to enter China’s television media market, but the alternative is to be left to the mercy of others, including competitors.  Caution also is necessary as regulations liberalize in fits and starts.  Witness Wal-Mart and IKEA, which, after many hard years of lobbying are still moving carefully and slowly into India’s recently “open” retail goods sector.

This last point is relevant to higher education as India begins to reduce entry barriers for foreign providers through new regulations. Do Universities have the necessary resources to manage regulatory risk? Do they have the patience to plan accordingly? York University’s Schulich School of Business was expected to launch its MBA in September 2013 after announcing a $100m campus in Hyderabad with local GMR infrastructure group a few years prior. York and Schulich have deep connections to India going back over a decade, and offer a good representiation of Canadian interests in the country as well as the challenges faced. After delays in India’s implementation of new education regulations, the Schulich School recently announced its intention to launch a much less ambitious twinning program referred to simply as Plan B. It still remains unclear when the highly capitalized campus-based plan will go ahead. But the fact that York is clearly ahead of many other Universities in preparation, local relationships, and resources in India should serve as an example to other, less experienced Universities with similar plans, particularly when such a large capital and time commitment is on the line.

Commiting (and Listening to) People on the Ground

Finally, the sheer amount of people multinationals deploy on the ground even before they have a serious presence in market is instructive.  This may not be possible for most resource-srapped Universities but doing so is often critical, even though the numbers will be a lot smaller (compared to MNCs with multiple operation sites and thousands of staff in a single country).  What is perhaps most important though is institutional commitment at senior levels: this inlcudes a signalling to local partners or audiences that the venture is taken seriously from the top down, an attempt to bridge “cultural distance” (see here), and confidence that key value creators such as faculty are fully on board. 

Two contrasting cases illustrate these challenges. Yale University’s tie-up with NUS in Singapore (which Yale does not consider a branch campus or able to issue equivalent Yale degrees) has generated a backlash from some of its faculty for both the perceived restrictions on academic freedom in the city state and the way in which the venture has been handled, whereby Yale Corporation managing the process by agreeing to the project without a faculty vote. Although cooler heads may prevail, one can scarcely imagine Proctor & Gamble making a decision at the CEO and Board level to launch a significant project without seriously consulting the senior executives that would be needed to make the venture successful. A full consideration of any potential impact on the brand would also be front and center in any decision, something which is apparently still unclear at Yale.

A more postitive example is University of Nottingham in Ningpo, China. University of Nottingham began with University exchanges and multiple research collaborations in the 1990s, years before it took the plunge to establish a serious local presence. That experience was no doubt helpful in creating a clear vision for its future. A case study highlighting University of Nottingham’s joint venture foreign university with Wanli Education Group in China emphasizes the following success factors:  full equivalent quality to UK parent; adjusting program offerings to local context and needs including a “foundational” year for English and other subjects; establishing research in line with China’s future needs; senior executive and government commitment; constant and open communication; bilingual staffing and staff mobilility over time; investment of cash and intellectual property. The significant amount of time researching the market, testing it with smaller initiatives, establishing a joint venture with full commitment of cash, IP and management resources, and sustaining the venture with constant new initiatives palatable to both parties may seem inordinate but actually is the minimum required for success. 

In sum, Universities contemplating initiatives with far fewer resources, internal buy-in, and lower levels of commitment might question whether their ambitious vision in Asia is worth pursuing after all.   

Why Asia’s Real Competitive Race Will Be Brains, Not Arms

In late 2012 the governments of Indonesia, Thailand and Malaysia followed a long line of Asian countries in calling for the end of “cheap labor.” This was on the back of China’s tumultuous labor issues at Foxconn and elsewhere, which signaled a push toward higher wages and the need for economic “re-balancing.”  Yet developing Asia’s economic shift toward higher value added services and the attempt by individual countries to avoid a “middle income trap” will depend primarily on how quickly and effectively their future populations are educated, and it is not an easy task.  Governments can pronounce loudly about raising minimum wages and building innovation centers, but without more competitive and targeted education investment many will fall short — and this will have serious economic, social and investment consequences.

Fortunately, educational access is now less of a problem.  Between 1970 and 2005, college enrollment rates in Asia grew from an average of 6% to 35%, with rapid acceleration in Korea (8 to 71%), China (1 to 22%), Malaysia (2 to 29%), and Hong Kong (7 to 32%). Supporting this pipeline was a drive toward universal primary school graduation rates, which rose in Asia from 78% to 96% of students over the period, and high school completion, increasing from 28% to 72% (based on UNESCO data). This new generation of students helped create Asia’s economic second-generation “miracle” (after Japan, Korea and Taiwan led the way) and is how Asia has sharpened its competitive edge in manufacturing and selected service industries.

By 2020 the number of students enrolled in college in the Asia-Pacific is expected to reach 100 million students; 200 million by 2034. At this time 42% of global enrolments will be from East Asia and the Pacific.  China alone is expected to have roughly 20% and 30% of the world’s total college enrolments by 2035, while other countries projected to have large numbers of enrolments by 2035 are Indonesia, Vietnam, Malaysia and the Philippines.  In South Asia, India will be the world’s second largest market in terms enrolments after quadrupling its present enrolment levels; Iran and Bangladesh are expected to be in the world’s top 10 and Pakistan in the world’s top 20.

Driving this change in education investment and intensity are several critical factors:  demographics, affordability, technology application, workforce demands, public finance, the globalization of education, and the role of private investment. 

Education demographics and access will continue to expand.  Asia as a region is educating more students for longer periods of time than ever before and it is moving rapidly towards universal K-12 completion.  The figure belowshows enrollment ratios for high school and college by country, which by any measure is a dramatic improvement from a few decades ago with most countries (with the notable exception of Pakistan, Cambodia and Laos) approaching or surpassing the levels of secondary education found in so-called “high income” countries.

College Enrolment Rates (Gross %) in Asia:   “High Income” versus the Rest

Source: UNDP

Looking ahead, Asia’s current student pipeline is such that higher secondary completion rates will, in turn, create a larger demand curve for post-secondary education and hence professional training.  Moreover, even China’s enrollment rates will need to double just to reach OECD levels of 50-60 per cent participation — and China is a relative development star.   Laggards such as India (with fewer than 15 percent of high school students going to college), Vietnam and Indonesia are only now beginning their takeoff phase. 

Higher per capita income translates to education spend.  By 2030 the Asia-Pacific region is projected to account for almost 60% of all global Middle Class Spending (as measured in Purchasing Power Parity dollars), from barely more than 20% in 2009 (see figure below).  This is expected to have a profound impact on household education spending, where levels estimated at 15 per cent of total household income is spent on education in countries such as Korea and China. 

Asia’s Percentage Share of Spending by the Global Middle Class (in 2005 PPP US Dollars) to 2030

At a macro level, economic growth as measured by GDP correlates closely with spending on education at the household level, from K-12 through continuing education.  In larger developing countries such as China and India, as in Japan, Korea, Taiwan and Singapore before it, discretionary savings by families have been the main source of education funding and their savings levels are among the highest percentage worldwide.  

Culture explains Asia’s intense education focus but there are other, more structural reasons:  public education has been affordable and heavily subsidized at the college tuition level (as opposed to the student loan model in the US), allowing families to devote significant resources to supplementary education, early education and K12 cram school programs geared toward college admission.  Like the US, there has been considerable discontent with public education systems across the region, allowing parents with higher disposable income to take education into their own hands while giving their kids a leg up to outcompete everyone else.  As Asia’s middle classes expand, places such as India and Vietnam will be under mounting pressure to boost private innovation and education-related investment for decades to come.  The mad competition among student populations that we have long witnessed in Japan and Korea is already filtering across the region as “examination hell,” the race for credentials and higher paying jobs continues without end.

Online learning and technology intensity is gaining speed.  By 2012 Asia had over one billion internet users representing 44.8 percent of the world; China alone had 513 million users. Yet Asia’s relatively low penetration rate of 26 per cent suggests many more people will gain access.  Just as many Asian countries leaped straight to mobile rather than fixed line communications, advances in online learning will obviate the need to build-out expensive, capital intensive and slowly evolving brick-and-mortar education systems at the time when rural demand is massive.  It is now cliché to note that Web and IT-related learning technologies will expand access, create student-centric learning models, facilitate peer-to-peer interaction, provide scale for cross-border education application and collaboration, lower delivery costs, and challenge inefficient educational systems everywhere.  In Asia the use of online education offers a truly transformative impact.

Spending splurge on training and certification.  Multinationals operating across the region claim they are starved of management and engineering talent. Skills training and human resource management are expected to become even more central to successful global business strategies, regardless of industry, as the number of people working in services and knowledge industries continues to rise.  This is especially relevant to Asia, which is also moving rapidly into tradable services.  In China and many parts of Asia, the so-called “talent gap” is a well-documented problem and is already inhibiting productivity growth.  The response will be more direct investments in global talent acquisition and training by multinationals and other stakeholders, either by themselves or outsourced, as traditional education options fail to meet the needs of the workplace. 

Employment pressures cannot be sustained by the public purse. As the figure below illustrates, the most severe employment pressure between now and 2050 will fall upon India and South Asia generally, as well as the Philippines, Vietnam and Indonesia.  All of these countries, with the exception of the Philippines, have been laggards in education development within Asia and will require Herculean efforts just to keep pace with these changes.  This will place even more pressure on education investment.  By contrast, China’s aging population will lessen this burden after recently reaching a youth population peak.

Asia’s Workforce to 2050 (Millions of Workers):  Employment Pressure Mounting

Borderless student platforms provide alternatives to Asian students. Education is in the early stages of large-scale globalization despite the conservative and self-preservation instincts among many educational institutions around the world.  Historically, teaching and training has been culturally specific, confined physically to the community, and linguistically impenetrable to a large swath of population.  As economies, workers and languages are increasingly operating across borders, education must follow. Anticipating this change, international students exchanges are expected to nearly triple to 8 million in 2025 from 3 million in 2005, with the US and Asia driving this growth.  Note that the United States has a highly visible foreign student community and accounts for 22 percent of the entire international student market, yet only 3.5 percent of students on college campuses came from abroad in 2008.  US students increasingly studying in Asia will also make this a two-way street.

Private investment and for-profit models in education will expand dramatically.  Early and growth stage venture capital and private equity interest continues to provide funding opportunities for education and training companies in China and Asia.  This follows a clear pattern set in the US a decade earlier, and through the present day venture capital interest, and is creating deeper public markets and a wider range of investable companies on both sides of the Pacific.  Strategic buyers across education and media sectors, are aggressively investing in late-stage education businesses and schools across emerging markets as they seek to expand their respective global footprints.  As the world’s obsession with education is reflected in capital market investment, venture capital, strategic buyers, and individual investors should drive favorable long-term liquidity conditions.  

I will address specific investment trends and opportunities in a future post.