No More Learning

The real impact of capital flows is on the underlying nature of power. When ownership crosses a border, it alters the organization and institutions of power on both sides of that border and, eventually, the significance of the border itself. In this sense, capital mobility creorders the very state of capital -
19 Globalization of course has numerous other dimensions, but these are secondary for our purpose here. For more on the globalization debate, see Gordon (1988), Du Boff et al. (1997), Sivanandan and Wood (1997), Burbach and Robinson (1999), Hirst and Thompson (1999), Radice (1999), Sutcliffe and Glyn (1999) and Mann et al. (2001-2).
? Breadth 351 from within and from without - and it is this fundamental transformation
that we need to decipher.
Capital movements and the unholy trinity
Most analyses of capital movement concentrate on its alleged cyclicality. The common view is that, although capital flow has accelerated since the 1980s, the acceleration is part of a broader recurring pattern, and that the peaks of this process in fact were recorded during the late nineteenth and early twen- tieth centuries (Taylor 1996).
The standard approach to these ups and downs in capital mobility is the so-called 'Unholy Trinity' of international political economy. According to this framework, there is an inherent trade-off between (1) state sovereignty, (2) capital mobility and (3) international monetary stability - three conditions of which only two can coexist at any one time (Fleming 1962; Mundell 1963; Cohen 1993). 20
Thus, during the 'liberal' Gold Standard that lasted until the First World War, limited state sovereignty allowed for both free capital mobility and international monetary stability. During the subsequent inter-war period, the emergence of state autonomy along with unfettered capital flow served to upset this monetary stability. After the Second World War, the quasi-statist system of Bretton Woods put a check on capital mobility so as to allow domestic policy autonomy without compromising monetary stability. Finally, since the 1970s, the rise of neoliberalism has, again, unleashed capital mobility, although it is still unclear which of the other two nodes of the Trinity - state sovereignty or monetary stability - will have to give.
Why has the world moved from liberalism, to instability, to statism and back to (neo)liberalism? Is this some sort of inevitable cycle, or is there an underlying historical process here that makes each 'phase' fundamentally different? The answers vary widely. 21
Liberal interpretations emphasize the secular impact of technology that constantly pushes toward freer trade and greater capital mobility, with unfor- tunate setbacks created by government intervention and distortions. From this perspective, post-war statism, or 'embedded liberalism' as Ruggie (1982) later called it, was largely a historical aberration. After the war, governments took advantage of the temporary weakness of capitalism to impose all sorts
20 The rationale is based on the external account identity between the current and capital balances. If the international monetary system were to remain stable (in terms of exchange rates), governments can retain domestic sovereignty over exports and imports only if capital movements are controlled to 'accommodate' the resulting current account imbalances. In the absence of such capital controls, governments would have to give up their policy autonomy; if they don't, the mismatch between the current and capital balances would lead to currency realignment and international monetary instability.
21 For views and reviews, see Cerny (1993), Helleiner (1994), Sobel (1994) and Cohen (1996).
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of restrictions and barriers. Eventually, though, the unstoppable advance of information and communication forced them to succumb, as a result of which the rate of return rather than political whim once again governs the move- ment of capital.
Critics of this natural-course-of-things theory tend to reverse its emphasis. Thus, according to Helleiner (1994), the key issue is neither the expansionary tendencies of technology and markets, nor their impact on the propensity of capital to move, but rather the willingness of states (i. e. governments) to let such movements occur in the first place. From this viewpoint, state regulation is not an aberration, but rather the determining factor - and one that govern- ments remain free to switch on and off.
One important reason for such cyclical change of heart, suggests Frieden (1988), is the shifting political economy of foreign debt. According to this view, during the Gold Standard, Britain became a 'mature creditor', and therefore was interested in liberalization so that its debtors could have enough export earnings to service their foreign liabilities. The United States reached a similar position during the 1970s, and since then it has used its hegemonic power to re-impose liberalization for much the same reason. According to Goodman and Pauly (1995), this second coming of liberalism was further facilitated by the desire of governments to retain the benefits of transnational production. The latter desire required that they also open the door to trans- national financial intermediation, hence the dual rise of portfolio and foreign direct investment.
Global production or global ownership?
Plus c? a change, plus c'est pareil? According to the globalization sceptics, the answer is pretty much yes. Despite the recent increase in capital mobility, they point out, most companies remain far more national than global (see for instance, Doremus et al. 1998; Weiss 1998; Hirst and Thompson 1999). The extent of transnational production is fairly limited: its share in global GDP rose from 5. 6 per cent in 1982, to 6. 8 in 1990, to 10. 1 per cent in 2006. Even the world's top 100 transnational corporations are not yet 'fully' global: their 2005 'Transnationality Index' - defined as the average of the ratios of foreign to total assets, foreign to total sales, and foreign to total employment - is only 60 per cent, compared to 51 per cent in 1990. 22
The data themselves are hard to argue with - only that they aren't really the relevant ones to use. As noted in the preamble to this section, capital flow denotes the movement not of machines or production, but of ownership. The key issue, therefore, is not the location of factories and employees, but of the capitalists, and from this latter perspective the picture looks very different.
22 The ratios in the paragraph are computed from the United Nations Conference on Trade and Development (2000, Table I. 1, p. 4 and Table III. 3, p. 76; 2007, Table I. 4 p. 9 and Table I. 12 p. 26).
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Seen from the assets side of the balance sheet, a company whose factories and offices are all located in the United States is entirely 'domestic'. But this 'all-American' production tells us nothing about the company's liabilities. If its owners float bonds on the European market, borrow money from a Kuwaiti bank, or sell their equity to a Korean capitalist, their company - although still 'domestically' located - suddenly becomes 'global'.
How extensive is the globalization of ownership as distinct from the globalization of production? According to recent research by the McKinsey Global Institute, between 1990 and 2006 the global proportion of foreign- owned assets has nearly tripled, from 9 per cent to 26 per cent. The increase was broadly based: foreign ownership of corporate bonds rose from 7 to 21 per cent, of government bonds from 11 to 31 per cent and of corporate stocks from 9 to 27 per cent (Farrell et al. 2008: p. 73, Exhibit 3. 10).
How do these ratios compare to the situation during the late nineteenth and early twentieth centuries, a period when capital mobility was supposedly hitting a record high? Since there are no data on global assets in that earlier period, the question is impossible to answer directly. But we can examine the process indirectly, by measuring the growth of global assets relative to global GDP. This comparison is presented in Figure 15. 4. The estimates, taken from
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? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Figure 15. 4 Ratio of global gross foreign assets to global GDP
* Gross foreign asset stocks consist of cash, loans, bonds and equities owned by non-residents. Source: Obstfeld and Taylor (2004), pp. 52-53, Table 2-1.
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the work of Obstfeld and Taylor (2004), show the ratio of gross foreign assets (comprising cash, loans, bonds and equities owned by non-residents) to world GDP.
Based on this approximation, the historical transnationalization of owner- ship seems far less cyclical that the globalization sceptics would like to believe. The chart confirms the build-up of foreign assets during the latter decades of the nineteenth century, as British imperialism was approaching its zenith; it shows the relative build-down of these assets during the first half of the twen- tieth century, as instability, depression, wars and capital controls hampered the movement of capital; and it demonstrates the resurgence of foreign ownership since the early 1970s, as embedded liberalism gave rise to global capitalism.
The amplitude of this long-term 'cycle', though, has increased quite a bit. During the previous phase, foreign assets peaked at less than 20 per cent of world GDP; in the current phase, which so far shows no sign of abating, their ratio to GDP has already surpassed 90 per cent.
Net or gross?
The question, then, is: How could a supposedly cyclical pattern of foreign capital flows generate what seems like a secular surge in foreign capital stocks? The answer is twofold. First, even if the movement of capital indeed ebbs and flows, over time the impact it has on the level of capital stocks tends to be cumulative (a point emphasized by Magdoff 1969). A second point, less intuitively obvious but equally important, is that the movement of capital may not be as cyclical as it seems.
Note that most analyses of capital flow concentrate on net movements - namely, on the difference between inflow and outflow. 23 This choice is inade- quate and potentially misleading. Capitalist integration and globalization can move both ways, which means that the proper measure to use here is the gross flow - that is, the sum of inflow and outflow (Wallich 1984). The net and gross magnitudes are the same when capital goes only in one direction, either in or out of a country. But when the flow runs in both directions, the numbers could be very different.
The divergence of the two measures is clearly illustrated in Figure 15. 5. The chart contrasts the net and gross capital flows in the G7 countries (with both series expressed as a per cent of the G7's gross fixed capital formation). 24
23 The main reason for this choice is convenience. Direct data on capital flow often do not exist; those that do exist are difficult to obtain; and most of those who write on the subject prefer to stay clear of empirical research in the first place. Unfortunately, the analysts have found an easy way around these difficulties. The national accounting identities make net capital flow equal to the current account deficit, by definition; and since data for the latter are readily available, most writers simply use them to approximate the former.
24 We stick to the G7 (G8 without Russia) in order to maintain sufficiently long time series.
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G7 cross-border private investment flows as a per cent of gross fixed capital formation
Note: Series are smoothed as 3-year moving averages. Flows comprise direct and portfolio investment. Gross flows are computed as the sum of inflows and outflows. Net flows are computed separately for each country as the difference between inflows and outflows and are then converted into absolute values and aggregated. Each series denotes the ratio of overall G7 flows to overall G7 gross fixed capital formation, both in $US.
Source: IMF's International Financial Statistics through Global Insight (series codes: LAF for the $US exchange rate; L93E&C for gross fixed capital formation); IMF's Balance of Payment Statistics through Global Insight (series codes: B4505 for direct investment abroad; B4555Z for direct investment in the reporting country; B4602 for portfolio investment abroad; B4652Z for portfolio investment in the reporting country); Global Insight International Database (series codes RX@UZ for Euro/$US exchange rate; IFIX@EURO for fixed capital formation from 1998 for EU countries).
It shows that since the 1980s, the relative increase of gross private flows was both powerful and secular, whereas that of net flows was more limited and cyclical. As a result, by 2007 the value of gross flows reached 82 per cent of green-field investment, compared to only 16 per cent per cent for net flows. 25
Unfortunately, lack of historical data on gross movements makes it diffi- cult to compare current developments with conditions prevailing at the turn
25 Note that the series in Figure 15. 5 are based on end-of-year data and therefore fail to reflect shorter 'hot money' movements.
Including these latter movements in our measure would have further widened the disparity between the gross and net flows.
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of the twentieth century. Nonetheless, the facts that the share of gross invest- ment in GDP was generally higher then than now and that two-way capital flow is a relatively recent phenomenon, together serve to suggest that the cur- rent pace of globalization, let alone its level, may well be at an all time high.
Capital flow and the creorder of global power
Theoretically, the common thread going through most analyses is the belief that capital flows in response to the 'primordial' forces of production and trade. According to this view, capital flows are directed by profit signals; profit signals show where capital is most needed; and capital is most needed where it is the most productive (comparatively or otherwise).
To us, this view is akin to putting the world on its head. The global move- ment of capital is a matter not of production and efficiency but of ownership and power. On its own, the act of foreign investment - whether portfolio or direct - consists of nothing more than the creation or alteration of legal enti- tlements. 26 The magnitude of such foreign entitlements - just like the magni- tude of domestic entitlements - is equal to the present value of their expected future earnings. And since the level and pattern of these earnings reflect the control of business over industry, it follows that cross-border flow of capital reflects the restructuring not of global production, but of global capitalist power at large. 27
26 The popular perception that 'direct' investment creates new productive capacity, in contrast to 'portfolio' investment which is merely a paper transaction, is simply wrong. In fact, both are paper transactions whose only difference is relative size: investments worth more than 10 per cent of the target company's equity commonly are classified as direct, whereas those worth less are considered portfolio.
27 The 'delinking' of capital flows from the 'underlying' growth of production (assuming that they were previously linked) is slowly dawning even on the most religious. In a recent gathering of the world's central bankers at the Jackson Hole Retreat, the pundits sounded almost bewildered:
Today, capital flows 'uphill' from poor to rich nations - above all the US - in contrast to the predictions of all standard economic theories. Moreover, as Raghu Rajan, chief economist at the International Monetary Fund, explained at Jackson Hole, there is no evidence of a positive relationship between net capital inflows and long-term growth in developing countries. Foreign direct investment may be a special case. But overall, the correlation is negative: countries that have relied less on foreign capital have grown on average faster. This is surprising, since extra capital should normally boost growth.
(Guha and Briscoe 2006, emphasis added)
But then, just to make sure that bewilderment doesn't clash with faith, the experts quickly blame it all on 'distortions':
One possible explanation, Mr Rajan said, is that developing countries may be unable to absorb foreign capital effectively because they have inadequate financial systems. . . .
? (Ibid. )
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One of the first writers to approach international capital mobility as a facet of ownership and power was Stephen Hymer (1960). In his view, firms would prefer foreign investment over export or licensing when such ownership conferred differential power, or an 'ownership advantage' as it later came to be known. Based on this interpretation, the power of US-based foreign inves- tors seems to have risen exponentially over the past half-century, as illus- trated in Figure 15. 6.
The chart presents two proxies for the globalization of US business. The first proxy, measuring the share of export in GDP, provides a rough indica- tion of the contribution to overall profit of outgoing trade. The second, measuring the share of foreign operations in overall net corporate profit, approximates the significance of foreign as opposed to domestic investment.
Up until the 1950s, the relative contribution to profit of foreign assets was similar to that of export (assuming domestic and export sales are equally profitable, so that the ratio of export to GDP corresponds to the ratio of
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Trend growth rate: 2. 4% per annum
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Figure 15. 6 The globalization of US business: ownership vs trade
* Receipts from the rest of the world as a per cent of corporate profit after tax. Note: Series are smoothed as 5-year moving averages.
Source: U. S. Bureau of Economic Analysis through Global Insight (series codes: GAARP till 1998 and ZBECONRWRCT from 1999 for after tax corporate profit receipts from the rest of the world; ZA for after tax corporate profit; X for export; GDP for GDP).
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export profit to overall profit). But since then, the importance for profit of foreign investment has grown much faster than that of trade, reaching one third of the total in recent years. This faster growth of foreign profit may seem perplexing since, even with the recent resurgence of capital mobility, US trade flows are still roughly three times larger than capital flows. But then, unlike trade, investment tends to accumulate, and that accumulation eventually causes overseas earnings to outpace those generated by export.
This divergence serves to heighten the power underpinnings of trade liber- alization. Advocates of global integration, following in the footsteps of Adam Smith and David Ricardo, tend to emphasize the central role of 'free trade'. Unhindered exchange, they argue, is the major force underlying greater effi- ciency and lower prices. And as it stands their claim may well be true. Indeed, downward price pressures are one reason why dominant capital is often half-hearted about indiscriminate deregulation, particularly when such deregulation allows competitors to undermine its differential margins. Yet despite this threat, large firms continue to support freer trade, and for a very good reason. For them, free trade is a means to something much more impor- tant, namely free investment - or more precisely, the freedom to impose and capitalize power.
Foreign investment and differential accumulation
Although difficult to ascertain with available data, the cumulative (albeit irregular) build-up of international investment must have contributed greatly to the differential accumulation of US dominant capital. The reason is that whereas exports augment the profits of small as well as large firms, the bulk of foreign earnings go to the largest corporations. Therefore, it is the global- ization of ownership, not trade, which is the real prize. While free trade can boost as well as undermine differential accumulation, free investment tends mostly to raise it. But then, since free investment can come only on the heels of liberalized trade, the latter is worth pursuing, even at the cost of import competition and rising trade deficits.
Foreign investment, like any other investment, is always a matter of power. The nature of this power, though, has changed significantly over time. Until well into the second half of the nineteenth century, the combination of rapidly expanding capitalism and high population growth enabled profitability to rise despite the parallel increase in the number of competitors. 28 There was only a limited need for business collusion and the explicit politicization of accumulation - and, as a result, most capital flows were relatively small port- folio investments, associated mainly with green-field expansion (Folkerts- Landau, Mathieson, and Schinasi 1997, Annex VI).
28 See for example, Veblen (1923, Ch. 4), Josephson (1934), Hobsbawm (1975, Chs 2-3), Arrighi, Barr, and Hisaeda (1999) and Figure 12. 3 and related discussion in this book.
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Eventually, though, excess capacity started to appear, giving rise to the progressive shift from green-field to amalgamation as described earlier in the chapter. Yet for more than half a century this shift was mostly domestic, with mergers and acquisitions first having to break through their various national 'envelopes'. It was only since the 1970s and 1980s that the process became truly global, and it was only then that the character of capital flow started to change.
The need to exert control has moved the emphasis gradually toward larger, 'direct' foreign investment, while the threat of excess capacity has pushed such investment away from green-field and toward amalgamation. At present, over 75 per cent of all foreign direct investment takes the form of cross-border mergers and acquisitions (United Nations Conference on Trade and Development 2000: 117, Figure IV. 9).
From a power perspective, therefore, one could say that during the late nineteenth and early twentieth centuries capital mobility was still largely a matter of 'choice'. But by the end of the twentieth century it became more or less a 'necessity', mandated by the combination of excess capacity and the cumulative build-up of giant firms, for which profitable expansion increas- ingly hinges on global amalgamation and creeping stagnation (Proposition 3 in Chapter 14). 29
In summary, there is a long but crucial link leading from the broad power imperatives of capitalism, to the logic of differential accumulation, to amal- gamation, to capital mobility (Proposition 5 in Chapter 14). From this view- point, the purpose of globalization is not aggregate growth but differential gain; it is driven not by the quest for greater global efficiency, but by the need to control efficiency on a global scale; and finally and most importantly, it is inherent in the capitalist creorder. Without the globalization of ownership, dominant capital cannot break its national envelope; and if it cannot go global, its differential breadth is bound to collapse. In this sense, globaliza- tion is part of the inner logic of accumulation. It can be reversed only by altering that logic, or by moving away from it altogether.
Appendix to Chapter 15: data on mergers and acquisitions
There are no systematic historical time series for mergers and acquisitions in the United States (other countries have even less information). The mergers and acquisitions series constructed in this chapter and plotted in Figures 15. 2 and 15. 3 is computed on the basis of various studies. These studies often use different definitions, covering different universes of companies.
The dollar values of mergers and acquisition for the 1895-1919 period are taken from Nelson (1959, Table 14, p. 37), whereas those covering the 1920-29 period come from Eis (1969), as reported in Historical Statistics of
29 'Economic growth' of course is hardly an end in itself. It is only that, in capitalism, such growth is crucial for the livelihood, employment and personal security of most people.
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