Walter Block defends multinational corporations in developing countries

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Source: Quotation of the day….. – AEI | Carpe Diem Blog » AEIdeas.

@jamespeshaw nails the #TPPA policy trade-off @NZGreens

About 1% more GDP but higher drug prices.

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Source: No increased medicine costs under TPPA | Stuff.co.nz

The next best arguments James Shaw made were xenophobia about foreign investment in land and some vast conspiracy theory regarding endangered dolphins.

When your next best argument is foreigners are coming to buy up all our land, you are playing from a weak populist hand. About half of million New Zealand born live in other countries.

About 80% of these live in Australia, the great majority as residents rather than as citizens. These New Zealanders living in Australia and elsewhere need protection under international agreements to ensure they are not the victim of populist outbreaks against the sale of land to foreigners.

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Source: Statistics New Zealand.

In addition, if a foreigner wants to pay over the odds for my house I am glad to separate a fool from his money.

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Source: Statistics New Zealand.

New Zealand has a strong interest in protecting the rights of its own expatriates as well as New Zealand foreign investors to buy land in other countries. As David Friedman explains:

Much more commonly, [economic imperialism] is used by Marxists to describe–and attack–foreign investment in “developing” (i.e., poor) nations. The implication of the term is that such investment is only a subtler equivalent of military imperialism–a way by which capitalists in rich and powerful countries control and exploit the inhabitants of poor and weak countries.

There is one interesting feature of such “economic imperialism” that seems to have escaped the notice of most of those who use the term. Developing countries are generally labour rich and capital poor; developed countries are, relatively, capital rich and labour poor. One result is that in developing countries, the return on labour is low and the return on capital is high–wages are low and profits high. That is why they are attractive to foreign investors.

To the extent that foreign investment occurs, it raises the amount of capital in the country, driving wages up and profits down. The effect is exactly analogous to the effect of free migration. If people move from labour-rich countries to labour-poor ones, they drive wages down and rents and profits up in the countries they go to, while having the opposite effect in the countries they come from.

If capital moves from capital-rich countries to capital-poor ones, it drives profits down and wages up in the countries it goes to and has the opposite effect in the countries it comes from. The people who attack “economic imperialism” generally regard themselves as champions of the poor and oppressed.

To the extent that they succeed in preventing foreign investment in poor countries, they are benefiting the capitalists of those countries by holding up profits and injuring the workers by holding down wages. It would be interesting to know how much of the clamour against foreign investment in such countries is due to Marxist ideologues who do not understand this and how much is financed by local capitalists who do.

New Zealand’s Experience with Territorial Taxation | Tax Foundation

New Zealand is one of only two developed countries, the other being Finland, that switched from a territorial tax system to a worldwide system.Both eventually returned to a territorial tax system for competitiveness reasons. New Zealand went one step further in their experiment with worldwide taxation by ending deferral.

This resulted in a twenty year stagnation in foreign investment at a time when foreign investment was growing dramatically in the rest of the developed world.

This coincided with an economic decline in New Zealand relative to Australia and the rest of the developed world. Because foreign investment is key to accessing the world’s consumers, it is not surprising that less foreign investment translated to less economic prosperity at home.

The New Zealand experience shows that ending or limiting deferral in the United States, as President Obama and others have proposed, would likely have severe economic downsides. Instead, as New Zealand eventually did in 2009, the U.S. should implement a territorial system that exempts foreign earnings.

via New Zealand’s Experience with Territorial Taxation | Tax Foundation.

More evidence of mass kidnappings of activists

Why aren’t overseas development activists dancing in the streets to celebrate this turnaround in the economic climate of Africa through capitalism and the freedom to invest. The only possible explanation is mass kidnappings.

The North–South theory of product life cycles

Forecasts of the offshoring of service jobs, as an example, can be constituted into a theory of North-South product cycles. The North-South theory of the life cycle of products starts with their research and development and refinement by entrepreneurs in the advanced countries (the North) with some exporting (Grossman and Helpmann 1991a, 1991b). These innovations require resources to be invested with uncertain prospects of success. Entrepreneurs in the North compete to discover new technology-intensive products using the ample supply of R&D workers and human capital-rich workers in the industrialised countries (Grossman and Helpmann 1991a, 1991b).

As a new product matures and its production becomes more standardised, the bulk of its production can migrate to the less developed countries (the South) to take advantage of lower production costs, and these countries will become net exporters. In the South, entrepreneurs focus more on imitation. They invest resources in importing and learning the production processes developed and proven to be a success in the North (Grossman and Helpmann 1991a, 1991b).

The shifting of production of standardised products to lower-wage foreign locations will frequently be within the originating company via a foreign affiliate, because of uncertainties about property rights and contract enforcement institutions in the host countries, and only later to independent foreign firms (Antràs 2005). Within corporate hierarchies, the high-skilled managers in the developed countries will specialise in problem-solving and non-routine tasks. They will interact with middle managers and production workers in developing countries who perform the routine tasks (Antràs et al. 2006, 2008).

Contracts are typically incomplete either because they are difficult to write and/or because the court cannot enforce them. The World Trade Organization (2005, 2008) concluded that, for example, the location of offshored services depends on:

  • labour costs,
  • trade costs,
  • the quality of institutions, particularly the legal framework,
  • the tax and investment regime,
  • the quality of infrastructure, particularly telecommunications, and
  • skills, particularly language and computer skills.

Risks in contract negotiation and enforcement will influence which types of production is outsourced. Roughly one-third of world trade is infra-firm, and this intra-firm trade is concentrated in the capital-intensive industries because of the costs and risks of investing in contracting with arm’s-length suppliers (Antràs 2003). Considerations about R&D incentives, the availability of human capital and the quality of contract enforcement institutions weigh heavily on the development of new products and their initial and later locations of different stages of production.

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Products are initially developed in the highly industrialised countries because their sophisticated legal systems allow contracts to be enforced. Even then, in industrialised countries, the difficulties of writing and enforcing complicated contracts over the quality of new products early in the product life cycle encourages firms to make those products internally within the firm. Early in the product life cycle, if sub-contractors were used for key imports,  there would have to be continual renegotiation of contracts contracts to incorporate new innovations and learning by doing. As Antras says:

Global production networks necessarily entail intensive contracting between parties located in different countries and thus subject to distinct legal systems0

As the new product standardises, and product quality in consequence becomes easier to measure and contract over, initially the innovating firm will sub-contract within the industrialised country but in time will import from developing countries. In the first instance, these imports may be from affiliates established in the developing country to ensure greater control of product quality through direct ownership of the factory. As Antras says:

Firms contemplating doing business in a country with weak contracting institutions might decide to do so within firm boundaries to have more control.

The size and shape of the firm is a direct response to mitigate the costs of contracting over quality that is hard to measure  and which is constantly changing early in the product cycle. By assigning ownership rights to the party undertaking the more important investment in quality early in the product life cycle, entrepreneurs  and innovators can minimise the losses caused by lack of enforceable contracts over quality when quality is changing rapidly as the firm moves through the product life cycle.

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Boeing blamed the delays on the delivery of the Dreamliner on an unwillingness of sub-contractors to stand by their contractual obligations. In response, Boeing acquired some of the key sub-contractors to ensure that they delivered as promised. This is a classic operation of the theory of the firm  where the entrepreneur brings within the firm what is too expensive to transact on the market because of difficulties in measuring quality and defining and enforcing property rights over what has been contracted.

Why is NZ so hostile to foreign investment, 32nd in the Index of Economic Freedom 2015? USA is 66th!

investment fredom indexe of econ freedom

Source: 2015 Index of Economic Freedom

According to the Index of Economic Freedom 2015, in New Zealand

Foreign investment is welcomed, but the government may screen some large investments.

There was a major review of New Zealand foreign investment regulations about 10 years ago. The purpose of that review commissioned by the Labour government’s Minister of Finance, Dr Michael Cullen, was to deregulate the regulation of foreign investment in New Zealand.

At the time,under the Overseas Investment Act, the Minister of Finance could refuse permission to any investment. Australia’s current overseas investment regulations are the same. The federal treasurer may reject foreign investment proposals on the basis of an open-ended definition of national interest.

The last time that foreign investors had been refused permission to invest in New Zealand was in the early 1980s under then  National Party  Government Prime Minister Robert Muldoon. In a fit of pique, he refused permission to an Australian investor.

The revised foreign investment regulations limits the ability of government to reject foreign investors to narrow criteria such as the acquisition of sensitive land and large New Zealand companies. As part of this theme that foreign acquisitions of land was the main policy concern regarding foreign investment, the administration of the foreign investment regulations was moved out of a Overseas Investment Commission housed at the Reserve Bank of New Zealand to the very low key Land Information Office:

The Overseas Investment Office (OIO) assesses applications from overseas investors seeking to invest in sensitive New Zealand assets – being ‘sensitive’ land, high value businesses (worth more than $100 million) and fishing quota.

Naturally, subsequent to this genuine attempt by the Labour government of 10 years ago to deregulate foreign investment regulation, a number of investments have been refused since then often on the pretext that some part of the investment acquired sensitive coastal land door or rural land. The criteria for regulating foreign investment is as follows:

As regards the criteria relating to the relevant “overseas person”, the OIO needs to be satisfied that:

  1. the “overseas person” has demonstrated financial commitment to the investment; and
  2. the “overseas person” or (if that person is not an individual) the individuals with ownership and control of the overseas person (such as the shareholders and directors of the overseas purchaser):
    1. have the business experience and acumen relevant to that investment;
    2. are of good character; and
    3. are not prohibited from entering New Zealand by reason of sections 15 or 16 of the Immigration Act 2009 (e.g. persons who have been imprisoned for certain periods of time).

As regards the criteria relating to the particular investment, the OIO needs to be satisfied that the overseas investment will, or is likely to, benefit New Zealand (or any part of it or group of New Zealanders). When considering this, the OIO has a range of factors that it must consider (including, for example, whether the investment will create new job opportunities, introduce new technology or business skills, advance a significant Government policy or strategy, or bring other consequential benefits to New Zealand).

The New Zealand Initiative recently reviewed this criteria for regulating overseas investment into New Zealand and found that:

the report finds that the criteria for approval do not test the economic benefit to New Zealanders, where sensitive land is sold to an overseas person not intending to live in New Zealand indefinitely.

Indeed, the criteria are unambiguously hostile, even excluding the gain to a New Zealand vendor. This opens the way for the imposition of approval conditions that could impose net costs on New Zealanders given the regime’s potentially adverse effects on land values

The regulation of foreign investment in other countries is much more specific about what it is trying to achieve,as New Zealand Initiative also noted in its recent review:

New Zealand’s comprehensive screening regime accounts for our poor international ranking in the OECD’s FDI Regulatory Restrictiveness Index.

Most other countries focus their regimes more narrowly on national security considerations, often relating to particularly sensitive industries or sectors.

The main reason the public supports foreign investment regulation is because the public doesn’t like foreigners, and politicians pander to that xenophobia. If foreign investment is reduced, more of total investment spending has to be funded from domestic saving.

Access to foreign savings – trade in  savings – allows investment to be made sooner, consumption to be smoothed over hiatuses such as recessions, and consumption to be bought forward in the light of better times such  higher output and higher future incomes as because of foreign investment.The

The large national gains from foreign capital inflows is not part of that debate. A recent review of the gains from foreign capital inflows to New Zealanders found access to foreign saving led to national income per head, net of the servicing cost of foreign capital:

  • average income gains of $2,600 per worker arising on a cumulative basis from capital inflow over the period 1996 – 2006; and
  • growth in the value of New Zealand’s assets has greatly exceeded the rise in external liabilities to the extent that national wealth per head has risen by $14,000 in 2007 prices between 1996 and 2006.

You can’t let facts bugger a good story.

The foreign investment is in response to the high returns in the local market and the inflow of foreign capital will continue until local rates of return match those in other countries. Equalisation of risk-adjusted rate of returns is central to the operation of capital markets.

Stopping this process of equalisation of returns on capital through regulation only benefits the capitalists inside the country  because  the curbing of foreign investment  stops rates of return  falling to those overseas. Foreign investment regulation reduces the wages of New Zealand workers because they have less capital and fewer modern technologies to work with.

Fortunately, local capitalists can work in league with economic populists on the left and the right and the anti-foreign bias of the voting public to make it more difficult  for foreign investors to come to New Zealand and drive down the profits of  New Zealand capitalists. Who gains from that? As Paul Krugman said:

The conflict among nations that so many policy intellectuals imagine prevails is an illusion; but it is an illusion that can destroy the reality of mutual gains from trade.

The payoff from foreign direct investment in the USA

Paul Krugman on those soulless multinational corporations doing business in the Third World

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