Saturday, August 9, 2008

Why is FDI out of US more profitable than FDI into the US?

Mihir Desai of Harvard Business School says that portfolio investments into the US have been far more profitable than direct FDI investments. Inbound FDI into the US has averaged a return of 4.3% while outbound FDI from the US into other countries is about 12.1%. At the same time Wall Street went up more than any other markets in the world. Why is it so? Mainly because US companies traditionally invest in more controlled markets and have the advantage of getting cheaper cash and a better product and marketing portfolio (as a result of the controlled markets), while at the same time MNCs investing into the US have no such advantage of low-hanging fruit. [original article]

Why is it so difficult to make money as a direct investor in the
United States? Indeed, much of the rhetoric on investing environments
argues that the major destinations for U.S. outbound FDI—the developed
markets of Europe and Japan and the emerging markets of China and
India—are filled with capital controls and ownership restrictions. How
can the United States as a destination end up being so much less
attractive despite the relative absence of this usual litany of
investment obstacles?

Part of the answer may lie precisely in how these obstacles tilt the
playing field between local firms and multinational firms. In a series
of papers, [HBS associate professor] C. Fritz Foley, [University of
Michigan professor] James R. Hines Jr., and I have shown that distorted
environments are precisely where multinational firms have an advantage
relative to local firms. In countries with weak capital markets and
burdensome regulatory regimes, multinational firms can use their
internal capital and product markets to access global resources while
local firms can't. In effect, these distorted environments burden local
firms, create opportunities for institutional arbitrage for
multinational firms, and can lead to a successful set of foreign
activities for multinational firms.

The United States, in contrast, creates few such opportunities for
low-hanging fruit for foreign multinational firms relative to local
firms. As such, the conditions that may underpin the profitable
experience of U.S. firms as they expand abroad are not there for
foreign firms investing in the United States. More generally, the
presence of highly competitive local firms in the United States
undercuts efforts by foreign multinationals that don't have truly
differentiated capabilities. Simply replicating strategies that were
successful at home is likely to be insufficient in the United States.

Tuesday, August 5, 2008

Second Highest Bid auctions

Found this interesting post on Sriram Krishnan's blog where he describes the origin of the Vickrey auction that is used by Google and Yahoo! for the online advertising. Very interestingly, although it has some side-benefits of removing winner's curse and bid shading (see links on Sriram's blog), the real reason why this process was adopted [instead of the traditional English auction] is that the Google systems people wanted to reduce the loads on the server that would have resulted from people changing their bids rapidly:

There have been several articles documenting the work of Google's Salar Kamangar and Eric Veach in bringing this to AdWords. What is lesser known (atleast to me )is that they implemented this model to solve another problem entirely. I came across this old talk from a Google employee - in the speaker notes, it talks about how Kamangar and Veach implemented this feature to stop advertisers from logging into the system and modifying their bids constantly (since that's what people tend to do in an open English auction). By implementing a second price auction, they were hoping to reduce the load on the system.