FIRE-SALE FDI Picture Mom, Dad, and the kids in an upper-middle-class Asian family in 10 years'time: After loading up with cash at the corner Citibank, they drive off to Walmart and fill the trunk of their Ford with the likes of Fritos and Snickers. On the way home, they stop at the american-owned Cineplex to catch the latest Disney movie, paying with their Visa card. In the evening, after putting the kids bed, Mom and Dad argue furiously about whether to invest in a Fidelity mutual fund or in a life insurance policy issued by American International Group OK, it's a bit silly, and was meant to be: when The New York Times painted this portrait in early 1998, it was a deliberate caricature. Nonetheless, it drew attention to a real phenomenon: the Asian financial crisis, although marked by massive flight of short-term capital and large-scale sell-offs of foreign equity holdings, has at the same time been accompanied by a wave of inward direct investment. This inward investment to some extent reflects policy changes, as Asian governments, under pressure from the IMF and in any case desperate for cash, have dropped old policies unfavorable to foreign ownership But it also reflects the perception of many multinational firms that they can now buy Asian companies and assets at fire-sale prices A similar, though probably less marked, boom in inward direct investment took place in Latin America, especially Mexico, during 1995; so we can, at least preliminarily, regard the nexus of crises, fire sales, and surging foreign direct investment as an empirical regularity. As such, it raises several interesting questions 1. Why should direct investment surge at a time when foreign capital in general is fleeing a country? What does this tell us about the nature of such crises? 2. Is the transfer of control that is associated with foreign ownership appropriate under these circumstances? That is, loosely speaking, are foreign corporations taking over control of domestic enterprises because they have special competence, and can therefore run them better, or simply because they have cash and the locals do not? 3. Does the fire sale of domestic firms and their assets represent a burden to the afflicted countries over and above the cost of the crisis itself? (This question is likely to be raised with considerable force if the nationalistic backlash in Asia, which is clearly present although so far still surprisingly muted, becomes a more important aspect of the situation. "We must realize the great danger facing our country", Malaysia's Prime Minister Mahathir has already warned. "If we are not careful we will be recolonized. )Or is the ability to sell firms to foreigners, on the contrary, a mitigating factor in the crisis? These are all, I believe, relatively novel questions. as already noted, the phenomenon of fire-sale was widely regarded as superior to that of the West. Moreover, the Asian crisis -to a far greater ad FDI"was indeed present in earlier crises; but it has become far more prominent this time because o the scale of the Asian crisis, the extraordinary collapse of asset values, and-perhaps most import the abruptness of our re-evaluation of an economic and corporate system that just a few months extent than the Latin crisis of 1995- has led to the creation of a set of"new wave crisis models that seem better suited to the discussion of direct investment than the traditional currency crisis literatureFIRE-SALE FDI "Picture Mom, Dad, and the kids in an upper-middle-class Asian family in 10 years' time: After loading up with cash at the corner Citibank, they drive off to Walmart and fill the trunk of their Ford with the likes of Fritos and Snickers. On the way home, they stop at the American-owned Cineplex to catch the latest Disney movie, paying with their Visa card. In the evening, after putting the kids to bed, Mom and Dad argue furiously about whether to invest in a Fidelity mutual fund or in a life insurance policy issued by American International Group." OK, it's a bit silly, and was meant to be: when The New York Times painted this portrait in early 1998, it was a deliberate caricature. Nonetheless, it drew attention to a real phenomenon: the Asian financial crisis, although marked by massive flight of short-term capital and large-scale sell-offs of foreign equity holdings, has at the same time been accompanied by a wave of inward direct investment. This inward investment to some extent reflects policy changes, as Asian governments, under pressure from the IMF and in any case desperate for cash, have dropped old policies unfavorable to foreign ownership. But it also reflects the perception of many multinational firms that they can now buy Asian companies and assets at fire-sale prices. A similar, though probably less marked, boom in inward direct investment took place in Latin America, especially Mexico, during 1995; so we can, at least preliminarily, regard the nexus of crises, fire sales, and surging foreign direct investment as an empirical regularity. As such, it raises several interesting questions: 1. Why should direct investment surge at a time when foreign capital in general is fleeing a country? What does this tell us about the nature of such crises? 2. Is the transfer of control that is associated with foreign ownership appropriate under these circumstances? That is, loosely speaking, are foreign corporations taking over control of domestic enterprises because they have special competence, and can therefore run them better, or simply because they have cash and the locals do not? 3. Does the fire sale of domestic firms and their assets represent a burden to the afflicted countries, over and above the cost of the crisis itself? (This question is likely to be raised with considerable force if the nationalistic backlash in Asia, which is clearly present although so far still surprisingly muted, becomes a more important aspect of the situation. "We must realize the great danger facing our country", Malaysia's Prime Minister Mahathir has already warned. "If we are not careful we will be recolonized." ) Or is the ability to sell firms to foreigners, on the contrary, a mitigating factor in the crisis? These are all, I believe, relatively novel questions. As already noted, the phenomenon of "fire- sale FDI" was indeed present in earlier crises; but it has become far more prominent this time because of the scale of the Asian crisis, the extraordinary collapse of asset values, and - perhaps most important - the abruptness of our re-evaluation of an economic and corporate system that just a few months ago was widely regarded as superior to that of the West. Moreover, the Asian crisis - to a far greater extent than the Latin crisis of 1995 - has led to the creation of a set of "new wave" crisis models that seem better suited to the discussion of direct investment than the traditional currency crisis literature