10 International Organization turns were not significantly riskier than domestic returns,but in fact tended to be less so.39 The greater safety of foreign investments relative to home investments is easily explained;it derived from the nature of these investments,which,according to Arthur Bloomfield,"depended directly or indirectly on government action."40 Loans either went to foreign governments(Russia and countries in central and southern Europe), or,even when loans went to private companies,as in the case of railroad construction and other public investments (utilities,roads,bridges,harbors,telegraph and tele- phone networks),they were made possible by government assistance in the form of guarantees,land loans,and cash grants.Finally,the bulk of this investment was portfolio;a generous estimate places the relative share of direct investment of the total long-term international debt in 1914 at only 35 percent.4 The higher yield of foreign over domestic investments holding risk constant,albeit empirically established,is more difficult to explain.Edelstein offered two interesting hypotheses.42 A first hypothesis,which the author thought to be valid in the case of the United States,views foreign returns constantly running ahead of expectations: "Overseas regions had a tendency to generate greater amounts of profitable innova- tions and new market opportunities,periodically fostering greater disequilibria,which in turn left their mark on realized returns."A second hypothesis looks for higher returns in market imperfection:"Overseas areas evinced a tendency to generate more circumstances involving imperfect competition and,possibly,greater monopoly rents."The active role played by host governments in attracting foreign capital pre- dictably was a consequential source of monopoly rents. A third hypothesis,I venture,was the relative backwardness of receiving coun- tries.With the exception of the Netherlands,creditor countries(Britain,France,Ger- many,Belgium,Switzerland)were generally more advanced industrially than debtor countries.The differential timing of industrialization triggered a product-cycle ef- fect:high-growth sectors in debtor countries were already stable-(or low-)growth sectors in creditor countries.Although yields on new ventures may have been the same,risks were lower in newly industrializing economies.In contrast,investing in an advanced economy meant putting one's money into new ventures with untested rates of return. The boom in long-term flows would supply banks with the short assets they were so desperately looking for in two ways.First,the joint-stock commercial banks on the continent,and later in Britain,took over the floating and placement of long-term bonds.Although these bonds were nominally long term,and banks standardly held onto such bonds no longer than it took to place them among their clienteles,the safety and trading volume of these instruments made them easily disposable assets, easily convertible into cash,and thus de facto substitutes for short-term paper. Second,commercial banks would float a government or government-guaranteed long-term bond issue provided that they be given a share in the more lucrative short- 39.Edelstein 1982.138. 40.A.Bloomfield 1968,4. 41.Dunning1992,116. 42.Edelstein 1982.140.turns were not signiŽ cantly riskier than domestic returns, but in fact tended to be less so.39 The greater safety of foreign investments relative to home investments is easily explained; it derived from the nature of these investments, which, according to Arthur BloomŽ eld, ‘‘depended directly or indirectly on government action.’’ 40 Loans either went to foreign governments (Russia and countries in central and southern Europe), or, even when loans went to private companies, asin the case of railroad construction and other public investments (utilities, roads, bridges, harbors, telegraph and tele- phone networks), they were made possible by government assistance in the form of guarantees, land loans, and cash grants. Finally, the bulk of this investment was portfolio; a generous estimate places the relative share of direct investment of the total long-term international debt in 1914 at only 35 percent.41 The higher yield of foreign over domestic investments holding risk constant, albeit empirically established, is more difficult to explain. Edelstein offered two interesting hypotheses.42 A Ž rst hypothesis, which the author thought to be valid in the case of the United States, views foreign returns constantly running ahead of expectations: ‘‘Overseas regions had a tendency to generate greater amounts of proŽ table innova￾tions and new market opportunities, periodically fostering greater disequilibria, which in turn left their mark on realized returns.’’ A second hypothesis looks for higher returnsin market imperfection: ‘‘Overseas areas evinced a tendency to generate more circumstances involving imperfect competition and, possibly, greater monopoly rents.’’ The active role played by host governments in attracting foreign capital pre- dictably was a consequential source of monopoly rents. A third hypothesis, I venture, was the relative backwardness of receiving coun￾tries. With the exception of the Netherlands, creditor countries (Britain, France, Ger- many, Belgium, Switzerland) were generally more advanced industrially than debtor countries. The differential timing of industrialization triggered a product-cycle ef￾fect: high-growth sectors in debtor countries were already stable- (or low-) growth sectors in creditor countries. Although yields on new ventures may have been the same, risks were lower in newly industrializing economies. In contrast, investing in an advanced economy meant putting one’s money into new ventures with untested rates of return. The boom in long-term  ows would supply banks with the short assets they were so desperately looking for in two ways. First, the joint-stock commercial banks on the continent, and later in Britain, took over the  oating and placement of long-term bonds. Although these bonds were nominally long term, and banks standardly held onto such bonds no longer than it took to place them among their clienteles, the safety and trading volume of these instruments made them easily disposable assets, easily convertible into cash, and thus de facto substitutes for short-term paper. Second, commercial banks would  oat a government or government-guaranteed long-term bond issue provided that they be given a share in the more lucrative short- 39. Edelstein 1982, 138. 40. A. BloomŽ eld 1968, 4. 41. Dunning 1992, 116. 42. Edelstein 1982, 140. 10 International Organization