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.

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.

Google, SEO, Knol and the rest of the world

Google recently launched Knol, their wikipedia competitor which allows experts to own articles. The concept is interesting because Wikipedia allows free-for-all authorship, and by making the articles edited by experts and listing their owners clearly on the knol, Google hopes it will get higher quality content. The editors will stake their prestige on the quality of the content, and overtime Google could also share Adsense revenue with them.

However, a has also raised quite a storm in the teacup since people are speculating that Google will take undue advantage of its search traffic to drive usage of knol. Google has pretty much become the traffic policeman of the new web -- telling people where to go, and getting them there through its vast knowledge of the contours of the internetland. However, as is often the case in India, what do you do when lawmakers become lawbreakers? When a cop's car breaks traffic rules, do you give them a ticket? While I am hopeful Google will not quite reach the level of Indian police (or even Bennet, Coleman & Co.), but the question of Knol getting undue advantage (as against the much better established Wikipedia) can not be brushed aside.

The importance of Google's dominance of the web came to the fore front yesterday during a discussion at the Open Coffee Club's first meeting in Kolkata yesterday. Angshuman of Taragana complained that he had a hard time when Google dropped him out of their indexes for some reason he is yet to figure out. While he has several conjectures such as his wordpress translation plugin due to Google might have labelled all his pages as duplicate/spam, or changing his URL syntax using mod_rewrite, he couldn't really figure out what the problem was. Using the webmaster tools wasn't much help either. Finally, the way he resolved it was by telling the Google representative that he would stop his Adsense spending if his website wasn't restored -- he claims that is the only thing that works with Google. Being dumped by Google indices is quite scary for any website owner, almost like not being reachable from the Start button on a windows box, and there needs to be better mechanism to deal with such 'mistakes'.

Microsoft has often been accused of using its Windows strength to push its other services, and now Google could do the same. While Google has been the poster child of the internet, and we all continue to use its services in good faith, ignoring trespasses into content creation space, brushing aside its transgressions as mere mistakes -- one can hear whispers today and one expects them to soon transform into noises. The onus is on Google to uphold its "don't be evil" philosophy, and communicate its positive action proactively to the rest of the world. It has already done well for the last few years, but the time has come to be more open, more forthcoming, and more accommodating, or might find itself in the same boat as what Microsoft, AT&T and other monopolies have been in the past.

The sub-prime crisis from K@W

Just discovered a great resource on YouTube -- Knowledge@Wharton has a channel there. See this video on the sub-prime crisis:



To add to the video, I have also heard that once the sub-prime crisis started making its presence felt, the prices of the homes the sub-prime borrowers had bought fell and they realized that the amount they would pay was lower than what they would get by selling the houses. That only precipitated the crisis.

There are more interesting videos on the channel, including this one -- an interview with Sunil Mittal where he talks about entrepreneurship and his beginnings in the bicycle industry.

Water Powered car unveiled in Japan

Genepax, a Japanese company, has unveiled a car that can run on water. It apparently extracts Hydrogen from water and uses it to create energy to fuel the car. The prototype was driven around in the city of Osaka in Japan. Engadget has more details:

The key to that system, it seems, is its membrane electrode assembly (or MEA), which contains a material that's capable of breaking down water into hydrogen and oxygen through a chemical reaction. Not surprisingly, the company isn't getting much more specific than that, with it only saying that it's adopted a "well-known process to produce hydrogen from water to the MEA." Currently, that system costs on the order of ¥2,000,000 (or about $18,700 -- not including the car), but company says that if it can get it into mass production that could be cut to ¥500,000 or less (or just under $5,000)

There is a video from Reuters that I have tried to embed below, but I am not sure if it will show up on the final blog (here's the link to the Reuter's page that houses the video):



Update: Looks like there's more to it than meets the eye. See this discussion on Slashdot.

EasyEclipse - Making life easy for Developers

Link: http://www.easyeclipse.org

I went back to Java after quite sometime, and had a tough time installing some plugins (Visual Editor in particular, it is not supported as yet on the current Europa release and only on the previous Callisto) this site is really handy in case you want to get a setup with everything you need already installed. They have bundled everything together and everything just works!

They have also divvied it up into broad areas such as 'Desktop', 'Web', 'LAMP' and so on -- targeted towards programmers in that category. Apart from the fact that they have these distros, it was also a great place to find out what were the most useful plugins for development on the eclipse platform. I didn't even know they have very useful plugins even for things like database management and SVN.

A life saver for people not experts on eclipse, I must say.

The World is Round Again!

Came across an interesting article while browsing the net for Tata-JLo (!) deal yesterday. Pankaj Ghemawat, a chaired professor at Harvard Business School disagrees with Tom Friedman that globalization has reached its peak but instead believes that a lot of trade, immigration as well as "bits" travel only within national boundaries, and there is still a long way to go before we can knock down the walls we have built over centuries.

The findings fly in the face of Friedman's famous work. Take flows of people. Much as we would like to believe that this figure would be astronomically high, it is not. Says Ghemawat, "If you look at the stock of first-generation immigrants divided by the total population of the world, it is barely 2.9%."

In fact, he claims that in some metrics, we are just about reaching the 19th century level of globalization:

"On the people's side, the current ratio of immigrants to world population is slightly lower than in 1910. On the FDI side, we have probably reached new heights, but it wasn't until the 1990s that we got back to the FDI-to-GDP ratio that the world was seeing in 1901," says Ghemawat.

I can imagine this happening because of the FDI from Britain, France, and Spain into their colonies (which had been quite impoverished by then by monies being sent back as profits). A lot of flow today is in the reverse, the Tata-JLo deal being a case in point. It would be interesting to see detailed numbers, or perhaps they are present in the book.

In fact, at some point, I thought the claim that there is actually increasing localization of products which goes against globalization was being made. For instance, Coke and Wal-Mart and McDonalds have to take local tastes into account. I wonder if this would count as a case of more globalization or less globalization. I guess parts of it can be argued either way.

Link to the original article.