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.

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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.

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