Capitalism sans frontier?

by Prof. Robert Sutcliffe

BILBAO, SPAIN:  Thinking about the world economy is dominated by two big questions and the connection between them. The first is globalization; and the second is crisis.

Globalization is usually seen as the conversion of the world into a single economic space, one macroeconomy, or perhaps megaeconomy, and so, perhaps as a result, into a single seamless society and culture. And crisis today means the sudden onset in 1997 of a series of serious financial tremors starting in Asia, but still spreading and threatening to turn into a modern remake of the 1930s catastrophe movie.

Is the global megaeconomy really here? Has it caused the present economic earthquake? Who is responsible? Is there a way out and how will it all end? These are the troubling questions which are with us as the century wanes. Is it that not only one of the century's proud technological achievements, the computer, but also the whole human productive system which is hitting some gigantic millennium bug?

It is not part of the brief of UNCTAD's latest annual World Investment Report (WIR98) to answer questions posed this way. But its voluminous empirical content ought to throw light on some of the answers. In some 400 large pages of numbers, and mostly descriptive academic prose, the report sets out to provide the most complete body of data available on three things:

* the value and location of foreign owned capital;

* the value and direction of new direct investment flows; and

* the size and other characteristics of the largest transnational companies (TNCs).

In addition it provides a lot of less systematic data about other aspects of international capital migration along with discussions of various related aspects of government policy and TNC behaviour.

What does all this material tell us about the mysterious and extraordinarily complex international economic system in which and by which we live? And what does it tell us about the organizations which many people argue now rule the world?

The answer to both these queries, I think, is that it tells us many unsurprising things, many surprising things, and not a few perplexing things.

Measuring globalization

No one will deny that during the last 50 years the world economy has become much more international. There are proportionally more trade, direct investment and financial flows which cross national borders. The protagonists have sought this; and the obstacles to it have been progressively dismantled. Some people say we have arrived at a qualitatively new situation where there is a global (as opposed to just international) economy and where national borders in an economic sense no longer matter: firms think of the world as their sphere of operations and governments have lost control over economic events inside their own borders. WIR98 sheds some light on this question in various ways.

The WIR98 authors agree that globalization has occurred but contend that during the last two decades the world has globalized more rapidly through investment than through trade. Their evidence for this is that since 1980 FDI has risen much more sharply than exports and imports. In fact, trade (exports plus imports) as a share of world production was no more in 1996 than it had been in 1980. In the intervening period it had been less, dipping to a relative minimum in 1986 (Figure I.1, p. 7). If one commodity, oil, were removed from these figures they would show a more steady rise to the present level, but the point is basically correct.

Incidentally, due to careless data manipulation, the report grossly exaggerates the expansion of trade in the decade prior to 1980. The figures used to compile Figure 1.2.c, allegedly showing this, are totally erroneous and the graph should be ignored. According to the World Development Indicators (World Bank, 1998, CD-ROM), imports plus exports as a share of World GDP was 28% during 1970-72 and not 8% as shown erroneously in WIR Fig 1.2.c. All the national figures are wrong too.

FDI has shown a strong overall upward trend since 1984, accelerating even more after 1992. This is prima facie support for the WIR's argument that globalization is coming more through investment than through trade. Nonetheless, the argument should be evaluated more critically than is done by the WIR98 authors. Their own data shows that the phenomenon is far from universal and its nature means it may not last.

In 1997 the total flow of FDI was a little more than $400 billion of which 84% came from developed countries and 58% went to other developed countries. WIR98 estimates the flow of FDI to developing countries in 1997 at $149 billion, their share of the total continuing to rise. The following 27 countries or entities received more than $1 billion each: South Africa (considered by WIR a developed country), Nigeria, Argentina, Brazil, Chile, Colombia, Peru, Venezuela, Bermuda (fictitious tax haven investments), Mexico, Kazakhstan (oil and gas), China, Hong Kong, India, Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Vietnam, Czech Republic, Hungary, Poland, Romania, and the Russian Federation. Of these China received 31% of the total, and the top six countries about 70%. Contrary to general impressions the enormous majority of the FDI which goes to China comes directly from the rest of Asia in particular from the Chinese economic area (Hong Kong and Taiwan). Some of this has entered the area from outside but most represents the building of a multinational, ethnically Chinese capitalist class. Hence, if FDI internationally integrates the economies of the world, it does so in a very selective way, even more selective than trade which is somewhat less unequally distributed.

In addition, there are reasons to suppose that FDI is a much less effective integrator of economies than trade and to expect the recent surge to be reduced. In the first place, FDI has been much more erratic in the last four decades than trade. And the present crisis can be expected to reduce FDI much more than it reduces trade. Secondly, one of the major determinants of the recent surge of FDI, privatization, is temporary. WIR98 draws attention to the recent wave of privatisation as a cause of the surge of FDI, using statistics which underline its importance but also sow some confusion about it.

According to WIR98 data, a rising share of FDI flows during the 1990s has been accounted for by mergers and acquisitions (M&A) as opposed to new, "green field" investments. In the text, WIR98 says that in 1997, $236 billion (or 58%) of the total was M&A. So, since much of this is related to the wave of privatization, it cannot be expected to last, once all major state-owned industries have been privatized, which seems only a matter of time. WIR98 attributes a sharp fall in FDI to developing countries in the first half of 1998 to the financial crisis; but it may well be affected already also by the exhaustion of privatization opportunities.

In any case WIR98's use of these figures is rather perplexing. In the appendix table it gives two different estimates of M&A related FDI: one for deals involving majority purchases (more than 50% of the voting securities) and another for the total of M&A purchases.  The figure I quoted above is the majority one. The report does not explain why the 50% criterion is used here when, confusingly, the criterion used to define an affiliate of a TNC is ownership of 10% of the equity. So apparently some foreign firms become affiliates even though the money with which they were bought by the parent TNC may not be counted as FDI.

But is it counted in FDI? WIR98 says that 58% percent of FDI was for M&A, using the 50% criterion. But the total FDI figures seem to be defined as representing ALL FDI flows, independent of the degree of ownership which results. If that is so then, using the figures for the total M&A flows (Appendix Table B7), as much as 80% of FDI flows must be for M&A, a remarkable figure indeed.

But these apparently arbitrary decisions by the authors about how to count the figures leaves the reader a bit confused. It does not help that in Figure I.13 which summarizes the merger and acquisition figures, a footnote to the title says that the 50% definition has been used, when the contents of the table show that total flow definition has been used. The trouble with such mistakes in a report whose main purpose is to convey information is that it makes the reader nervous about the rest of the data which is not so easy to crosscheck.

If we put together a few of the facts revealed by WIR98, we must come to a surprising conclusion which its authors do not draw. They say that:

* FDI as a share of world investment (gross fixed capital formation) has been rising and in 1997 had reached 5.5% of the world total;

* but between 60 and 80 percent of this FDI is in the form of expenditure on mergers and acquisitions (due to privatization and to a world merger boom in which, incidentally, domestic mergers have been growing faster than cross-border mergers);

* FDI investors (TNCs) from developed countries are much more inclined to spend on M&A than their counterparts from developing countries, which prefer new "greenfield" investments.

From this we conclude that the 5.5% of world investment which FDI represents is a rather spurious figure. It is just a way of measuring the level of this rather hybrid concept of FDI. It does not mean that FDI contributes that percentage to capital formation (and so perhaps to economic growth) in the world. Most of it has no direct, immediate part in capital formation from an economic point of view, since it is simply spending to change the ownership of existing assets. That is not investment from the point of view of the economy, only of the investing firm. Part of the transfers of funds due to M&A might end up as new investment, but in a direct sense FDI, it seems, actually contributes no more than one to 2 percent of world capital formation. But interestingly FDI from developing country-based TNCs is more likely to contribute to capital formation and economic growth than FDI from developed country-based TNCs.

The evidence of the report, therefore, seems to knock the most common justification of free capital movements and FDI right out of the ball park. On this evidence, it is contributing hardly at all to worldwide growth and development; what it is doing is changing the pattern of ownership of industrial assets towards more concentration in the main developed countries.  WIR98 does not breathe a word of such a conclusion, but its data seem to make it irresistible.

Here, as elsewhere in the report, the authors' brief clearly does not extend to drawing evaluative conclusions about the benefits and drawbacks of foreign investment. The report seems implicitly to share the orthodox assumption that all international movement of capital must be good because it represents more efficiency for the firm and more capital for the recipient country.

Anatomizing TNCs

As always, WIR98 presents a large amount of very interesting and useful information about TNCs, their size, economic activities and structure. Like species of insects, more TNCs are detected by WIR every year and it says that many more are still out there waiting to be discovered. It claims that there are now at least 56,607 TNCs (liberally defined as firms with at least one 10%-owned foreign subsidiary), having nearly half a million foreign affiliates (Table I.2). Especially detailed information is given on the largest 100 of these worldwide (classed according to the value of their foreign assets) and also on the largest 50 whose home country is in the developing world. Two firms, Daewoo (of South Korea) and Petroleros (of Venezuela) are members of both clubs.

A problem with the extremely inclusive definition of the TNC used by WIR is that the category must include many qualitatively different firms, some with internationally integrated production structures, others with little if anything more than a sales branch in a foreign market. As WIR98 makes clear, while there is some correlation between size and degree of internationalization, the category TNC increasingly includes medium and small firms and it is these which seem now to be internationalizing most rapidly (p. 2).

WIR98 allows us to know something about the total of TNCs and even more about the top 100, but information about the rest, the variegated 50,500 or so non-giant TNCs is very scarce. So are hard facts about the market power of the TNCs. WIR98 does not add much to our knowledge of this, aside from quoting one example of the growth of concentration in the market for automobiles (p.26), where the share of world sales of the top four firms rose from 41 to over 44 percent between 1985 and 1995.

What WIR98 does do is expand our knowledge of the weight of TNCs in the world economy. First, how much of the world's productive capacity do the TNCs own? WIR estimates the total accumulated value of their foreign investment at about $3,500 billion (I will call it estimate A, found in Table I.1). For practical and conceptual reasons no one knows the total value of the world's capital stock of which this is a part. But economists sometimes use a rule of thumb, i.e. that it must be about twice the size of annual production (or perhaps a bit more). Since world production is about $30,000 billion, that would make the capital stock $60,000 billion; and that would mean that the 56,000 or so TNCs owned about 6% of the world's capital stock in the form of overseas investments. This is slightly larger than the estimate implicit in recent annual contributions of FDI to world investment (Annex table B.5, and see above).

Is this, admittedly very rough, estimate a little or is it a lot?  In the first place, it is very similar to even rougher estimates made of the same figure for the beginning of the 20th century. In this sense the world economy is certainly more globalized than 50 years ago but may be no more so than 100 years ago. A similar point can be supported about international trade. But that is not the whole story. These figures are very much lower than common perceptions. But the power of firms is not to be measured just by such percentages. Large firms may control much more than they own by virtue of their sheer size, weight and influence, of their many relationships with suppliers and other firms which operate in their orbit and, in this case, from the fact that foreign affiliates have more assets than those which are directly owned by the parent companies. So it is important to try to estimate the total size of the affiliates rather than just the part strictly owned by the TNC parents. In addition to the $3,500 billion as the total stock of foreign-owned capital, WIR produces an estimate of the total assets of the affiliates of TNCs. These are worth, it calculates, $12,600 billion (which I will call estimate B). That would be not 5% but 20% of the world's capital stock. So is it a more accurate estimate? WIR98 says it includes assets financed by local shareholders and local loans as well as financial capital (bank balances etc.). So it is a hybrid category of real and financial assets and is not comparable to the world value of real capital nor with the figure for FDI stocks (estimate A). It is also weakly based on no more than the application of a ratio calculated for the USA to the rest of foreign investment. But WIR98 gives partial data for foreign assets in a third form in its list of the 100 biggest TNCs (Table II.1). Here their foreign assets are listed and the total is $1860 billion. We are never given a definition of this category which would enable us to know whether it is in principle more comparable to estimate A or to estimate B. Depending on which equivalence is chosen the top 100, which are responsible for 24% of TNC foreign sales, account for either 60% or 17% of the assets of the TNCs. Both figures, for different reasons, seem improbable. WIR98's authors may feel that it would be too tedious to spell out more clearly all the assumptions and definitions which they use in their calculations, but it would make them a good deal more useful to readers who want to draw some conclusions from such a large amount of data.

The report contains several such instances of frustrating searches where you think you have found the fact you were tracking, you grab it only to find that you are holding two different, and what is more, apparently inconsistent facts. Of course, in fairness to the authors, the fact you want may simply not exist. But, in that case, would it not be better to give more prominence in the report to the assumptions, estimation methods and consistency between different figures?

Comparison of some of the different aggregate figures which WIR98 publishes often produce apparent anomalies which do not increase confidence in the data. For instance, what can explain the fact that for all TNCs sales of affiliates were 130% of the value of assets in 1982 but had fallen to only 75% in 1997 -- when by contrast for the top 100 TNCs foreign sales were 119% of foreign assets and total sales 98% of total assets? (Tables I.4 and II.1).

Or is it credible that gross product (value added of foreign affiliates) during the same period dropped from 30% of assets to under 17% in 1997, while gross product has stayed almost exactly the same percent of sales (22-23%) during the whole of the period (Table I.4). There may, of course, be explanations for such strange-seeming results but WIR98 simply gives us the numbers without stopping to notice, let alone speculate. The fact that such major changes in some of the ratios took place without obvious reasons during a relatively short period (15 years) cannot but make one at least wonder about the validity of the estimates.

A much more interesting and promising statistic with which to evaluate the importance of international capital is the value of what foreign affiliates produce. This has often been estimated by means of their gross sales or turnover, figures which grossly inflate their importance in relation to the size of economic aggregates. What is needed is an estimate of the value added which they produce (what they sell minus the inputs they buy from other firms), called by WIR98 'gross product'. This year for the first time estimates are published for the gross output of affiliates over a number of years as a percentage of world economic output:  from 1982 to 1997 it fluctuated around a slowly rising trend, starting at 5.3% in 1982 and rising to 6.9% in 1997. This, in principle, is quite a good guide to the relative weight of foreign production, and so is one measure of the degree of globalization of the economy. The 50,000+ TNCs produce more in their home country than they do abroad. The World Bank last year calculated their total gross product as equal to 22% of total world production. But 50,000 is a lot of firms. The figure for the top 100 is likely to lie in the region 8-10 percent.

Such estimates are new and no doubt will get revised. But it is worth mentioning a few curiosities. According to WIR98 the sales of all foreign affiliates are $9,500 billion while their gross product is $2,100 billion. This is a ratio of 4:1 between turnover and value added, one which in comparison with estimates of the usual value of this ratio is exceptionally large, once again arousing suspicions that at least one of the figures may be substantially wrong.

There is a final statistic which may be less subject to question and which produces an interesting result: it is the relation between affiliates' production and their exports. It is now several years since the estimate of the total sales of affiliates surpassed the value of world exports. In 1997 affiliates' sales were valued at $9,500 billion and world exports at $6,432 billion. WIR98 comments: "firms use FDI more than they use exports... to service foreign markets" (p.5). This conclusion is unconvincing since the foreign sales have an import content and in many cases represent little more than marketing subsidiaries.

Be that as it may, a common conception of TNCs is that they use FDI plus exports to service the home market, looking for cheap labour and other inputs and importing what used to be produced in the home country. There is no doubt that happens; but WIR98 produces clear evidence that it is not the rule for FDI. The exports of affiliates in 1995 (no later estimate was available) were estimated to be 32% of world exports (a little higher than 13 years previously) and, more pertinently, the share of affiliates' sales which was exported was 23.5%, a figure showing no tendency to change since the early 1980s (Table I.5). In other words more than 76% of affiliates' sales are in the markets of countries where they operate. And the proportion exported to the home country must be much less than 23.5% of sales since the affiliates also export to third countries.

But these figures will not lay to rest the fear that there is a difference here between investment in developed and developing countries. The report also presents evidence to show that the share of output exported is sometimes a lot higher in Japanese and US investments in Asia (Table VII.3). The prevalence of export processing zones (Table III.5) also indicates investment is of this kind. And last year's WIR contained evidence of a significant increase since NAFTA in the proportion of the sales of affiliates in Mexico being exported to the USA.

It was several years ago that WIR began to put forward the line that the TNC was a qualitatively new form of enterprise; in other words, that globalization referred in part to the structural nature of firms and their production systems. The new TNC not only traded and invested in countries other than its country of origin but increasingly it created a network of productive units in different countries but all integrated in the same production system, what WIR calls a "complex integration strategy". That began as an argument without much empirical backing other than a few anecdotal cases, some of which were later abandoned. But the idea carried on and this year WIR98 tries to develop it more. It aims to produce more backing for the idea by quoting the results of a recent survey of the views of 300 TNC managers. About 1/3 of these believed that their companies were fully global or highly coordinated internationally in 1990. By 1996 the proportion had risen to just over 50%; and nearly 80% considered that their companies would be so by the year 2002 (Box II.3). These are, of course, subjective responses and should be placed beside other literature questioning the real degree of global integration of the typical TNC, but they may represent a significant change.

Democratizing the world

Despite a common tendency to exaggerate the trend, there is no doubt that the world economy has been becoming more internationally integrated. Globalization changes the space within which relevant economic actions take place. And such a change means, as happens more or less continuously in history, economic space and political space may get out of phase with each other. We may find ourselves with institutions and practices at the political level appropriate for a different ordering of economic space. Globalization means larger economic spaces. The political response to it takes two forms: those who are pessimistic about the possibility of politically democratizing such larger, up to global, spaces either become fatalistic or oppose globalization which they see as the root of all problems; the alternative is to look for ways of democratizing ever larger spaces. I think that it is by no means obvious that it is easier to democratize smaller spaces than larger ones (look at the family!). But it is certainly a daunting task for those who want a juster world to democratize the whole planet so that the new abuses and new problems caused by a more global capitalism can be controlled.

How on earth is such a general politico-philosophical point relevant to WIR98, a dense compilation of statistics? In fact, in several ways of which I will mention three. First, a large section of this year's report (Chapter III) is devoted to an informative discussion of legal regimes governing FDI, especially to actual and proposed multilaterally agreed FDI rules. The kind of multilateral regime governing the rights and duties of foreign investing TNCs which can be established must be a major determinant of the degree of democracy which exists in a more global age. WIR98 describes fully and well the surprisingly large amount of international activity in recent years on this question as governments and others ask such questions as: is there any legal check on the activities of TNCs? should there be special laws governing foreign as opposed to national investment? should TNCs be able to move their assets and money as they wish? should they have any obligations about employing and training local personnel, about wages and working conditions, about repatriating their profits? should TNCs be protected against nationalization? can TNCs be prevented from having monopoly positions in markets? Just such questions arose in 19th century Europe, as the new industrial capitalism spread within countries and seemed to demand a new role for the embryonic capitalist state. Erratically and ambiguously laws were established to police the capitalist firm, in some cases protecting it and in others curbing its excesses and reducing its freedom.

The most ambitious international attempt to answer these questions so far is the Multilateral Agreement on Investment (MAI) launched (and now perhaps sunk) by the OECD. This international code was debated amid much secrecy -- not surprising in view of the fact that it reads rather like a freedom charter for international capitalists. Its sections are almost all designed to protect firms against governments. It calls on the "hosts" to act more graciously to the guests; but there is virtually no mention in the agreement of the behaviour of the "guests". The implementation of agreements like the MAI would leave firms free of responsibilities and with their assets protected in all circumstances, regardless of their business, employment and other policies and of their market shares.

It is, to say the least, ironic that, to judge from WIR98's account, one of the central demands of foreign investing businesses in these discussions is for openness and transparency in the taking of investment-related decisions by government bureaucracies. With that it is hard to disagree. But capitalist firms are surely among the most non-transparent and undemocratic of the world's institutions. And there is little or no pressure on them to become more transparent. They are in fact often obsessed with the protection of business secrecy. And their internal regimes, if compared to those of states, would put most of them towards the totalitarian end of the spectrum.

Foreign investors also demand freedom to cross borders and non-discrimination (to have exactly the same rights and conditions as national capitalists) when they do so. What would be the reaction, I kept wondering when reading this, if ordinary human beings, rather than major corporations, were to demand such rights to unrestricted crossing of national borders and to non-discrimination? The question is rhetorical because we all know the answer.

WIR98 would not allow itself such ironic comments, but its description of ongoing debates about global governance as it affects migrant capitalists captures well the flavour of the recent debate in which firms and international organizations try to create a regime much more one-sidedly pro-business than exists, at least formally, in most national states. The struggle for a more democratic global business regime will evidently be difficult.

But WIR98 also tells a story which suggests that such struggles are far from hopeless, and here is a second link between global economic democratization and WIR98. Faithful readers of WIR over the years will be quite startled to find in this report a boxed essay entitled "Defining civil society" (p.60). This is, of course, one of the trendiest subjects of our time. But WIR98 writes about it in the context of the surprisingly successful campaign waged against the MAI - once its contents belatedly came to light. A large coalition of unions, parliamentarians and NGOs collaborated to attack the provisions of the MAI. They forced the OECD to the negotiating table on the issue and their campaign has been one element in the present virtual abandonment of the MAI. The success of this campaign reveals a little of the possibilities of democratizing larger spaces. And WIR98 is to be commended for recognizing its importance for the development of the reality on which they report annually.

WIR in recent years has been among the advocates of a multilateral investment regime and the new report speculates (pp 128-9) that such a regime would on balance increase the amount of FDI. The very tentative tone of this argument, however, may represent some tacit acknowledgement of the strength of the campaign against the MAI.

Even so, WIR98's argument is still couched in very limited terms:  the effect of the international regime on the quantity of FDI (presumably more equals good). The issue of what effect multilateral investment rules will have on the qualitative impact of FDI, especially its effects on development, are still not among WIR's concerns, though it seems to me that they ought to be.

The third connection concerns all sources of data about the world economy, including reports like WIR98. One of the keys to democratization at the global, as at all other levels, is information. That means free, independent, critical international media and also a flow of information necessary to analyze, evaluate and plan actions from state and state-like institutions. There is some information which only a state-like institution can possess and disseminate since it is based on information collected from all the component units. So the state produces national accounts and national labour statistics and national demographic statistics. And for the world that task goes to the many quasi-state institutions which exist at the global level, elements perhaps of a still-to-be-created global state. Along with other specialized agencies of the UN, UNCTAD and the WIR98 authors are in that category. Reports like WIR98 are part of the process of creating an informed global civil society and democratizing the world. Such information does not need to be produced in a critical framework to serve this purpose. It can be useful independently of the ideological and political assumptions of the institutions which produce it. In this sense we are fortunate that a group of experts continue to produce an annual report of high professional quality, containing such detailed information about an important aspect of the activities and structure of the capitalist institutions which dominate the world economy. And with some of the inconsistencies and mysteries removed the report can become increasingly useful.  But there are some things which WIR does not do and is unlikely to do and which at the present time no body does effectively. One of these is to produce information about financial globalization. The IMF and the Bank of International Settlements produce something but there is at present no annual international report which tries to do for migrant finance capital and international banks what WIR98 tries to do for migrant productive capital and TNCs.

Equally there is no sign of an international body which examines not the structure, statistics and policies of TNCs but their abuses: of workers, of the environment, of democratic rights. WIR98 is a long way from being the modern, globalized equivalent of the British factory inspectorate of the 19th century. If the WIR98 authors knew of the kind of abuses which those agents of the 19th century British state used to reveal, their present brief would almost certainly prevent them from saying so. Yet there is quite enough partial, sometimes anecdotal, evidence to suggest that the more global advance of capitalism of recent years has exacerbated many of its abuses and injustices. Some NGOs, critical scholars and journalists have revealed some of these abuses. But they do not have the power to investigate as systematically as the factory inspectors (so often quoted by Marx and other critics of capitalism) did in the 19th century. While UNCTAD's Geneva neighbour the ILO does a certain amount of work of this kind, the factory acts appropriate to a more global capitalist economy are still a very long way from being enacted. (SUNS4321)

(Robert Sutcliffe, who contributed this review article of WIR-98, is professor at Hegoa, Institute for the Study of Development and the International Economy, University of the Basque Country, Bilbao, Spain. He is author of several books and articles in academic journals, and has edited or contributed chapters to several others.)

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