Sunday, August 31, 2008

UK SME financing

The University of Cambridge Centre for Business Research has a survey of UK SME financing for 2007.

The survey of businesses with less than 250 employees was carried out in the autumn of 2007, but is unlikely to have captured the full consequences of the credit crunch and slowing economy. It shows that there has been a decline in the use of external finance from 81% of firms in 2004 to 69% in 2007. However, the majority of firms said that there had been no change in the ease of obtaining finance and 71% of those seeking new finance received all that they sought. The report examines these headline figures across firm sizes, regions and industrial sectors. It also includes special chapters on key topics such as female-led businesses, start-up businesses, super growth businesses and those in deprived areas.

Real appreciation

Karolina Ekholm, Andreas Moxnes and Karen-Helene Ullveit-Moe look at the effect of the 17% real appreciation of the Norwegian Krone in the 2000 to 2001 period. Using micro data of the performance of Nowegian firms, they find three things:

First, the real exchange rate shock was associated with substantial employment losses. One-seventh of the total decline in manufacturing employment over the period under study can be attributed to the real appreciation.

Second, the shock led to productivity gains at the firm level, indicating that the most exposed firms were able to improve efficiency in a period of tougher foreign market conditions. One-fifth of the productivity improvement over the same time span can also be attributed to the real appreciation. Somewhat surprisingly, we do not find evidence of market reallocation effects; the real appreciation does not seem to have been associated with a reallocation of resources from low-productivity to high-productivity firms.

Third, firms responded to the real appreciation by offshoring (Ekholm and Ulltveit-Moe 2007), thereby purchasing a larger share of their intermediate inputs from abroad. For the manufacturing industry as a whole, the real appreciation increased the import share of intermediates by about 1.5%

This gives some insight into the costs of the Dutch disease.

Michael Veseth looks at the affect of US dollar depreciation on the US wine industry.

Saturday, August 30, 2008

Asymmetric risk

The FT reports Merrill Lynch having lost a quarter of its profits for the 36 year period as a listed company in the space of 18 months.

This is a similar performance to that of hedge funds that find a skewed distribution for their returns. There are steady profits in return for taking asymmetric risk. This is also linked to the short-term nature of governance and incentives.

Saturday, August 23, 2008

Diamonds are forever

The Atlantic looks at the history of the diamond. The main focus is marketing and the preparation of the market. However, there is also a lot of interesting information about the control of pricing even in the face of adversity.

Here are some diamond prices from Swivel, an end of 2007 cross section rather than time series.

Monday, August 18, 2008

New technology

How do business deal with new technology that threatens to provide an alternative product?

Economic Principals
looks at the way that the newspaper industry has to adapt.

Those enormous rolls of newsprint, tank-cars of ink, long lines of presses and fleets of delivery vans are the newspaper industry’s best friends. Among business strategists, they are known as barriers to entry. The capacity to print and deliver the paper product from cities around the world is what makes newspapers different from everything and everyone else in this media-sodden world. Precisely from all this impedimenta – and the paper product it produces – does the authority of newspapers’ increasingly extensive Web-based operations derive.

The example of the radio and television can provide some insight. Radio has its own strength. It is particularly powerful when you cannot watch a picture because you are doing something else. The strength of the newspaper is that it can be passed around. In some ways it is much easier to find things. The newspapers have the advantage of having good, clear links to the sources of information. That have reputation.

Wednesday, August 13, 2008

Monday, August 11, 2008

Soft skills

Richard Reeves looks at the importance of soft skills in the labour market and the way that they contribute to inequality.

Recent claims about social mobility in Britain grinding to a halt are exaggerated. But it does seem that the likelihood of a person being upwardly mobile is increasingly influenced by personal qualities such as confidence and self-control. Julia Margo, associate director of the Institute for Public Policy Research, has assembled an impressive body of evidence linking character to life chances. Her work, which draws on that by Leon Feinstein at the Institute of Education, shows that measured levels of "application"—defined as dedication and a capacity for concentration—at the age of ten have a bigger impact on earnings by the age of 30 than ability in maths. Similarly, what psychologists call an "internal locus of control"—a sense of personal agency—at the age of ten has a bigger impact than reading ability on earnings.

There is also a BBC Analysis programe here.

This fits well with the argument from Chris Dillow that self-esteem is associated with higher earnings. It is also consistent with his idea that we can see the world as a zero-sum or positive sum. If our circumstances, lack of resources and limited opportunity reinforce the zero-sum view of the world, this would tend to undermine our ability to get a better job; if our circumstances support a positive-sum view of the world with benefits from co-operation, trust and thrift, this will encourage this the behaviour that is more rewarded in regualar society - particularly the labour market.

Sunday, August 10, 2008


The Economist looks at valuation and returns on asset classes in the long-run.
This is roughly how GMO goes about the process: it looks at the relationship between valuations and long-term returns. The return from equities, for example, is equal to the existing dividend yield, plus future dividend growth, plus or minus changes in valuations. Ten years ago, the dividend yield on the American market was low while valuations were high. The likely long-term return looked low, and so it has proved.

Using similar reasoning, GMO has a very gloomy outlook for the American and British housing markets at the moment. By using the ratio of the median house price to the median family income, GMO reckons that prices in America need to fall by 17% instantly or stay flat for four years to return value. In Britain, prices need to fall by 38% or stay flat for seven years. And of course, there is no guarantee they will stay at fair value; in the mid-1990s, they dropped well below it.

Friday, August 08, 2008

The end of an era

The FT reports.
We’re observing the end of an era in two very specific areas. First is the uncontrolled deregulation of global financial markets ... The second point is, the mindless commitment of human and financial resources to securitisation has reached its peak and now will contract for the indefinite future.

This is a trader's comment after the 1987 crash. It may be significant that this are the words of a trader. What is heard more often today are the words of Joe Public and the government. However, as the report points out, the fear of computerised trading has dissipated since 1987. Futures markets, which were used for Portfolio Insurance, are now mundane.

Risk management

A great overview from The Economist

Last but not least, change the perception and standing of risk departments by giving them more prominence. The best way would be to encourage more traders to become risk managers. Unfortunately the trend has been in reverse; good risk managers end up in the front-line and good traders and bankers, once in the front-line, very rarely go the other way. Risk managers need to be perceived like good goalkeepers: always in the game and occasionally absolutely at the heart of it, like in a penalty shoot-out.

Good coverage of some of the institutional issues as well as the limbo position of credit derivatives, standing somewhere between the trading desk and the credit desk and never gaining full attention.

There is a a reaffirmation of the way that banks sold the lower tranches and maintained the higher tranches for themselves, The position gradually increased as it thought inconceivable that these 'safe' assets could lose much value because of credit or market changes.

Thursday, August 07, 2008

Fans vs professionals

From the Guardian an analysis of odds offered by bookmakers for football in the last three years shows that betting on the top 10 in the league makes money while betting on the bottom 10 loses money. Do the gamblers and fans need to be enticed to bet for winners while fans will bet for their underdog losers even if the odds fail to provide compensation for the risk?

The Carry Trade

Gillian Tett
Most notably, because super-senior debt carried the triple-A tag, banks were only required to post a wafer-thin sliver of capital against these assets - even though this debt has typically offered a spread of about 10 basis points over risk-free funds. Thus, banks such as UBS and Merrill have been cramming their books with tens of billions of super-senior debt - and then booking the spread as a seemingly never-ending source of easy profit. It is not just the CDO desks that have been playing this game; treasury departments have been playing along. So have many hedge funds, including those financed by . . . er . . . the major investment banks.

Tuesday, August 05, 2008

Swimming naked...

A reminder from Lex that there are opportunities in a downturn.

The number of companies under offer, as reported by the Takeover Panel, is up 20% on the same period last year.

Monday, August 04, 2008

US overseas income

Returning to US overseas income. Alexander Hijzen looks at FDI and the effect on local wages.

Do foreign multinationals pay higher wages than domestic firms? Simple comparisons suggest they do. Moreover, wage differences between MNEs and local firms tend to be larger in developing countries, presumably reflecting the larger productivity advantage MNEs over local firms in those countries. Simple comparisons between MNEs and local firms, however, overstate the contribution of FDI to improving pay, because FDI is typically concentrated in the most advanced sectors and largest firms in the host economy, which would pay above-average wages even if they were locally owned. Even after correcting for this bias, it is still the case that MNEs offer better pay than domestic firms, particularly in developing countries where their productivity advantage is greatest.

It is probably the case that the full productivity is not reflected in wages. The pull from low level of local wages probably ensure that some of the productivity improvement is taken by the (possibly US-owned) MNE. However, it is much harder to achieve this in the competitive US market.

Saturday, August 02, 2008

Tragedy of the commons

A very good overview of the issues from The Economist

It is not simply that three-quarters of those living on less than $2 a day still depend in some way on commonly held resources. The concept of the commons is also spreading to new areas. Their essential feature is that they share one characteristic with private property and one with public goods. Like public goods, they are not “excludable”: the common resource is too extensive to keep people out very easily. But they are also “subtractable” (or “rivalrous”), like private property: if one person uses them, another’s access is diminished. (With a classic public good, such as street lighting, one person’s usage does not affect anyone else.) Many things other than rainforests or drylands share these attributes.

The important point for new areas like climate change is that tragedy is not innevitable.