I recently presented at an annual conference an emerging markets-focused hedge fund (>$1B AUM) held for their investors. They had some (small) exposure to North Korea in their portfolio and felt that it was necessary to learn more about the market, and educate their investors on the place. North Korea is probably ill-defined as an emerging or even frontier market, and until the word for such a market exists, I think it is better classified as a provocative thought exercise for investors. A point I made at the event is that execution matters far and above most other factors in evaluating opportunities in North Korea. Classifying opportunities by industry in North Korea is one way to study potential opportunities. However, I prefer a framework with different categorizations that better aids financial investors in understanding the challenges of executing in this market. I classify the economy broadly into the following segments:
1. Informal markets: These are the small-scale businesses that have been the focus of much scholarly work. However, given the lack of scalability in most of these businesses, these should not be the focus of most investors.
2. Scalable “private” businesses: These are businesses that are often run with tacit approval from the government, but whose managerial control and decision rights can be traced to specific individuals. These businesses span a range of sectors and have potential to be scaled up.
3. “Complex” industries: Unlike #2, businesses in this sector are not clear opportunities at the moment, but might be so in the unclear future. These are industries where there are no clear regulations or proof-of-concepts, resulting in uncertainty over how the government will treat the business. Examples include advertising or insurance, which faces restrictions that make them unlikely near-term opportunities.
4. State-Owned Enterprises: These entities are increasingly looking for joint-venture partners and like #2, they have the potential to be scaled up. The key differences with #2 are that they carry more legacy issues, have different incentive structures, and generally require more effort to navigate.