One Global Village? Competition in the International Active Fund Management Industry

We introduce an international active fund management model in which competing managers have heterogeneous incentives (effort productivities, costs) for searching domestic/foreign investment opportunities. In equilibrium, the domestic/foreign incentives heterogeneity gives rise to a novel prediction: increasing foreign competitiveness, which improves (worsens) domestic manager incentives, induces an increase (decrease) of both domestic performance and size. Empirically, we find that 30 global markets’ performance and size, on average, decrease with U.S. concentration. This evidence is consistent with our theoretical predictions but is inconsistent with extrapolation of single-country (implying homogeneous incentives) equilibria to one “global village” [e.g., Feldman, Saxena, and Xu (2020)].