Kindleberger's discussion suggested that in order to think about FDi we must therefore ask not why capital might flow into a country, but rather why some particular asset would be worth more under foreign than under domestic control. This in turn could reflect either higher expected earnings under foreign control, or a lower foreign cost of capital and hence a higher valuation on given earnings The interesting point is then that this dichotomy between two possible reasons for foreign ownership neatly matches our two different stories about financial crisis sort, would be that foreign firms could manage the assets better than domestic rivals and therefore p Consider first the moral-hazard view. The only reason for foreign ownership, in a pure model of th extract higher rents. Suppose, for example, that under foreign owners a given piece of land would yield 20 percent more than under domestic management. Then land would yield 120 in the good state, 30 in the bad, for an expected value of 60. Absent moral hazard, foreigners would outbid domestic investors for the physical assets But if domestic firms can borrow with implicit guarantees, they will be willing to pay higher prices than foreign owners despite their lower expected returns. As a result, foreign firms will be crowded out of the domestic market. (In terms of the balance of payments, this might well mean that domestic firms raise capital directly or indirectly by borrowing abroad The fire-sale FDI story is now clear. Suppose that in period 2 there is a collapse of the Panglos regime, either because of actual bad news or because of self-fulfilling expectations. Then the prices that domestic firms are willing to pay for assets will drop-in our case from 100 to 50- while foreign firms will still be willing to pay 60. So the result will be a transfer of ownership to the more efficient foreign firms In a pure moral-hazard version of the crisis, then, the drop in asset values is basically appropriate, and the transfer of ownership is an efficient move from the world s point of view: assets are being placed under the control of those who can use them best If we take a financial-panic point of view, matters look quite different. Suppose that foreign firms, the safe rate throughout. But they are less efficient at running domestic investment projects thay o unlike domestic investors during a panic, are not liquidity-constrained they can borrow and lend domestic firms(which must be the case here, otherwise they would have made the investments in the first place). In the absence of a crisis the foreign firms will not get involved. But once there is a crisis, any foreign firm that can take over a project in midstream and do sufficiently well to earn a final return greater than v(1+r-that is, any firm that is not liquidity-constrained and can earn more than the liquidation value by keeping the project in existence- will be in a position to buy the project from the crisis-stricken domestic intermediary. In this case there will truly be a fire sale. And such fire sales will typically transfer ownership to a foreign firm that is less efficient than the domestic firm, but now able to outbid domestic residents because of its superior cash position Thus our two alternative crisis stories seem to have opposite implications for the efficiency consequences of fire-sale FDI. If the drop in asset values really reflects the collapse of a moral an essentially arbitrary run on domestic intermediaries, it puts assets into the"wrong"hand eflects hazard-driven bubble, the reallocation of control is putting assets into the"right" hands; if it Before we make too much of this distinction however we should notice that in either case theKindleberger's discussion suggested that in order to think about FDI we must therefore ask not why capital might flow into a country, but rather why some particular asset would be worth more under foreign than under domestic control. This in turn could reflect either higher expected earnings under foreign control, or a lower foreign cost of capital and hence a higher valuation on given earnings. The interesting point is then that this dichotomy between two possible reasons for foreign ownership neatly matches our two different stories about financial crisis. Consider first the moral-hazard view. The only reason for foreign ownership, in a pure model of that sort, would be that foreign firms could manage the assets better than domestic rivals, and therefore extract higher rents. Suppose, for example, that under foreign owners a given piece of land would yield 20 percent more than under domestic management. Then land would yield 120 in the good state, 30 in the bad, for an expected value of 60. Absent moral hazard, foreigners would outbid domestic investors for the physical assets. But if domestic firms can borrow with implicit guarantees, they will be willing to pay higher prices than foreign owners despite their lower expected returns. As a result, foreign firms will be crowded out of the domestic market. (In terms of the balance of payments, this might well mean that domestic firms raise capital directly or indirectly by borrowing abroad). The fire-sale FDI story is now clear. Suppose that in period 2 there is a collapse of the Pangloss regime, either because of actual bad news or because of self-fulfilling expectations. Then the prices that domestic firms are willing to pay for assets will drop - in our case from 100 to 50 - while foreign firms will still be willing to pay 60. So the result will be a transfer of ownership to the more efficient foreign firms. In a pure moral-hazard version of the crisis, then, the drop in asset values is basically appropriate, and the transfer of ownership is an efficient move from the world's point of view: assets are being placed under the control of those who can use them best. If we take a financial-panic point of view, matters look quite different. Suppose that foreign firms, unlike domestic investors during a panic, are not liquidity-constrained; they can borrow and lend at the safe rate r throughout. But they are less efficient at running domestic investment projects than domestic firms (which must be the case here, otherwise they would have made the investments in the first place). In the absence of a crisis the foreign firms will not get involved. But once there is a crisis, any foreign firm that can take over a project in midstream and do sufficiently well to earn a final return greater than v(1+r) - that is, any firm that is not liquidity-constrained and can earn more than the liquidation value by keeping the project in existence - will be in a position to buy the project from the crisis-stricken domestic intermediary. In this case there will truly be a fire sale. And such fire sales will typically transfer ownership to a foreign firm that is less efficient than the domestic firm, but now able to outbid domestic residents because of its superior cash position. Thus our two alternative crisis stories seem to have opposite implications for the efficiency consequences of fire-sale FDI. If the drop in asset values really reflects the collapse of a moral￾hazard-driven bubble, the reallocation of control is putting assets into the "right" hands; if it reflects an essentially arbitrary run on domestic intermediaries, it puts assets into the "wrong" hands. Before we make too much of this distinction, however, we should notice that in either case the