Investment Globalization

Rebecca Giem

Investment Globalization within the World-system

Investment globalization is defined, in principle, as the proportion of all invested capital in the world that is owned by non-nationals (Chase-Dunn, 2000). The growth of investment within the world economy is simply one facet of the modern world-system, part of the triumvirate of trade, economic, and investment globalization, which combine to contribute toward transnational economic integration. Thus, investment globalization is part of the growing trend toward globalization in all sectors. This trend is due to the constant striving on the part of capitalists to accumulate more capital. As the economy goes through periods of stagnation and/or decline (as it inevitably must), the incentive for exploitation becomes ever stronger. With every new period of economic decline, capitalists find new ways of intensifying exploitation in order to retrieve their lost profits, leading to an overall increase in the amount of exploitation. According to Immanuel Wallerstein, this increase has manifested itself in two forms; "broadening," and "deepening."

Broadening

Broadening refers to the encroachment of capitalist exploitative practices into new parts of the world. The world-system as it first existed started out occupying only a portion of the world’s geography. By use of broadening, it gradually expanded to encompass the entire globe by the end of the nineteenth century. Broadening took place by means of incorporation, a three-step process. Firstly, a sector of a peripheral economy emerged which produced goods that were in demand elsewhere in the world-system. Secondly, workers in this peripheral sector lost control over their labor power, which passed into the hands of those who accumulated the surplus generated by the workers’ labor. Thirdly, this surplus ended up in the possession of capitalists in core states. Political mechanisms such as colonization were used to further incorporation.

Deepening

The second form of exploitation, deepening, refers to the increased application of capitalist economic relationships to more facets of life within societies already in the world-system. Five methods of this application can be identified (Hopkins, Wallerstein, et al., 1982:104-106). The first, commodification, is the process of making more goods available to be bought, sold, and owned as property. According to Wallerstein, the two most important forms of commodification have been the commodification of land and labor because both increase the economic factors of production available for capitalist exploitation. The second method of deepening, mechanization, is the practice of using machinery to maximize worker output, increasing the value of technological innovation. The third form of deepening, contractualization, refers to the increasingly legalistic nature of economic and social relations. The fourth form of deepening, interdependence, involves the growth of a highly specialized division of labor, which must exchange goods, leading to less and less self-sufficiency. The fifth form of deepening consists of the polarization of levels of wealth and political organization between core and periphery states; as the world-system expands, more and more core workers become full proletarians (whose wages are sufficient to reproduce their labor), and, conversely, more peripheral workers become super-exploited semi-proletarians. Wallerstein argues that this transition within the periphery has in fact resulted in lower living standards than existed previously.

Economic Cycles

These exploitative processes of broadening and deepening have not developed at a constant rate; instead they have followed the pattern of economic cycles. Most world-systems theorists believe that the world economy has gone (and is still going) through times of growth alternating with periods of stagnation. In addition to relatively brief cycles of prosperity followed by recession (business cycles), Wallerstein and his associates argue that there have been two main kinds of economic cycles in the history of the world-system: "Kondratieff (or long) waves," and "logistics" (Shannon, 1996:131).

Kondratieff Waves

Kondratieff waves consist of a period of economic growth followed by a period of stagnation. The typical Kondratieff wave lasts between forty to sixty years. Wallerstein calls the growth period "phase A" and the stagnation period "phase B" (Wallerstein, 1984). Wallerstein argues that Kondratieff waves are necessary to the process of capitalist development, as periods of economic expansion and high profits provide a setup for periods of economic stagnation and declining profits. In his view, this is because economic expansions are based on the creation of new economic activities and/or production techniques. The very newness of these techniques guarantees high prices for them. The growth in this new sector then provides a boost for the rest of the economy, and phase A of the Kondratieff wave is set in motion. This sudden prosperity attracts new firms to the sector. However, the demand for the sector cannot continue unlimited, and so as more and more firms enter the market, it becomes saturated. An overcrowded market leads to intense competition, which in turn leads to declining prices and, therefore, profits. The resulting lack of forward impetus from the new market produces the beginning of economic stagnation, setting off phase B of the Kondratieff wave. The conditions of this phase B create incentive to capitalists to increase exploitation through broadening and deepening, creating new surpluses with which to begin the next phase A.

Kondratieff waves are associated with many different national and world events. Joshua Goldstein (1988) has found a relationship between Kondratieff phase A and the severity of wars between core states. He finds that 90% of major wars between core states have occurred close to or at the end of a phase A, leading him to theorize that core states are more likely to wage war following a period of economic growth that allows them the resources to mobilize. Investment globalization, as part of the overall trend toward globalization, is also affected by Kondratieffs. Chase-Dunn (1989: 164), argues that the peak period for a core war is one in which the end of a phase A has begun to reduce the opportunity for productive investments and capitalist investors face declining rates of return, moving the capitalist class to turn to the state to protect and/or expand market share and investment opportunities.

Logistics

Kondratieff waves may take place within the context of even longer economic cycles. Called logistics, these cycles consist of a phase A of economic growth and expansion, followed by a phase T of transition, followed by a phase B of economic stagnation. Wallerstein and his colleagues have tentatively placed the pattern of logistics as follows:

Phase A: 1750-1815

Phase B: 1815-1897/1917(?)

Phase A: 1897/1917(?)-1967(?)

Chase-Dunn characterizes them as general "epochs" in the development of the world-system in which certain elements of the system first manifested themselves, particular trends reached maturity, or long-term contradictions or problems of the system became apparent (1989: 59-64). There is an approximate correspondence between Kondratieff cycles and logistics; however, the connection between the two remains unclear. What is clear is that the economic cycles of logistics are connected with world-systemic cycles of hegemony.

Hegemonic Cycles

A state is considered a hegemon when it has a major economic advantage over all other core states in the realms of production, commerce, and finance. The dominant hegemon has the most sway over investment globalization, as financial hegemony exits when one core country is the largest source of capital for international investment and the largest provider of financial services such as banking. As a consequence, the financial industry of the hegemonic country dominates the provision of international credit, the setting of interest rates, and the setting of currency exchange rates, and the hegemonic state’s currency is the main medium of exchange employed in international trade and finance (Shannon, 1996: 137). As hegemonic dominance in the areas of production and commerce provides the basis for financial dominance, if the hegemon loses its position in the areas of production and commerce, it also loses financial dominance and its position as the center of world finance (Wallerstein, 1982). Giovanni Arrighi (1994) argues that the financial backing (supported by investment profits) of political/military power is necessary to achieve and maintain hegemonic dominance. Consequently, hegemonic cycles have an enormous impact upon investment globalization, especially with regard to the relationships between the core and the periphery.

A hegemonic power benefits from economic access to all parts of the periphery, and uses its hegemony to muscle out all other core powers with interests there. An example of this in regard to the dynamics of investment globalization is the part the British hegemon played in the aiding of independence movements in South America. These movements destroyed the hold of the Spanish there in the 1820s, giving the British better access to South American markets, and enabling them to make major investments in the area.

Chase-Dunn (2000) hypothesizes the following model of the causes of investment globalization (see Figure 2).

Operationalizing Investment Globalization

The quantitative measurement and operationalization of investment globalization, or the degree of flux in amount of investment capital in relation to the size of the world economy, presents several problems. The first, most obvious problem is, quite simply, that there exists only one world-system, negating the possibility of cross-systemic comparison during the same era. The second problem is that, although the world-system arose very recently in a historical sense, the data for virtually all forms of trade and investment are sketchy at best for periods of time before approximately 1950. The third, perhaps most subjective, problem is that of deciding how to analyze the available data (i.e., public vs. private flows of capital, Kondratieff cycles vs. hegemonic cycles, etc.). All of these problems pose serious questions as to the accuracy of any quantitative measurement of investment globalization.

Comparative Analysis of the World-System

The seeming impossibility of comparative analysis of the world-system can be overcome by use of time-series methodologies. These measures monitor changes in variables over a period of time, and therefore open up the possibility of testing patterns of causation among these variables. One example of this type of methodology is Joshua Goldstein’s (1988) aforementioned work on the relationship between hegemonic and Kondratieff cycles. Goldstein hypothesizes that Hopkins, Wallerstein, et al., are wrong in their theory of correlation between hegemonic and Kondratieff cycles. Whereas Hopkins, Wallerstein, et al., believed that hegemonic powers emerge during periods of Kondratieff upswing (phase A), are firmly established during a phase B, reign supreme during another phase A, and decline during another phase B, Goldstein found, using time series analysis, that the pattern and number of Kondratieff cycles within a given hegemonic cycle varies from hegemonic cycle to hegemonic cycle. The only certain regularity he did find, again through the use of time-series analysis, was the emergence of all hegemonic powers after a large war between core states.

Goldstein (1998) also points out that socio-economic cycles of any stripe are seldom perfect in their timing, in contrast to the periodic perfection found in many biological cycles. Because of this, efforts to break down long-term economic cycles that use Fourier or spectral analysis are misleading because they assume that social cycles should closely approximate sine waves (Chase-Dunn, 1998: 323). Instead of viewing economic cycles as precise in their timing, Goldstein suggests the idea of "cycle time," in which economic cycles are variable in their timing, arguing that more emphasis should be placed on the sequencing of events and trend reversals than upon their spacing along the time dimension.

One way of escaping the emphasis on cyclical phenomena when measuring investment globalization is to run time-series studies on single countries; measuring the world-system part by part. As it is not empirically feasible to measure all forms and amounts of invested/loaned capital over a given time period, the sum total of all national GDPs is an effective estimator of the total economic size of the world economy. To create an equation for measuring investment globalization, one needs both a numerator and a denominator. The numerator should include international capital flows, ownership claims, and debts. The denominator is simply the aforementioned estimator of the total size of the world economy; the national GDP total.

When defining which elements of investment should be incorporated into the numerator, caution must be exercised. Transfer payments made by people to relatives in other countries are not true elements of investment. Similarly, neither are foreign reserves held by central banks for the purpose of supporting their currencies in the world money market. Payments for imported and exported goods should be likewise excluded, as they are trade-related rather than investment-related. However, all international financial transactions involving claims of ownership, control or debt are elements of investment; these include loans, direct equity investment, repatriated profits, and intrafirm transfers that cross state boundaries.

Data Splicing

The second problem faced when dealing with the measurement of investment globalization, lack of complete data, requires a careful approach. Data for investment flows are not available in a complete form until the year 1949, when the International Monetary Fund started compiling data on most major investing countries. Investment data becomes more and more complete and accurate as it nears the present day; data are available from the IMF now for over 250 investing countries, as compared to just 10 from the League of Nations in 1921.

Before the Second World War, data exist in various forms and measures; the available data reflect loans made from one government to another and some investments made by a select few firms. Because of this inconsistency of data series, any long-term measurement of investment globalization would do well to include these inconsistent measures along with more complete measure as more complete measures become available. This prevents some of the biases and inaccuracies inevitable to the measurement process, and provides a more comprehensive picture of investment globalization.

Research Design

The third problem with measuring investment globalization–that of research design–is highly subjective. However, a good research design should incorporate as much information as practically possible, while maintaining an unbiased perspective. Chase-Dunn (2000) proposes a fairly comprehensive research plan for the measurement of investment globalization involving a two-strategy approach. The first of these strategies involves compiling data on core countries (the main investing countries) on the outflows and the accumulated values of foreign loans and investments. This strategy hinges on a crucial assumption; the assumption that the majority of foreign capital comes from these few core states. The caveat to this assumption is that the number of countries involved in significant foreign investment increases over time, resulting in the exclusion of crucial investing countries from the data series. Another problem with this strategy is that it requires the conversion of country currencies into a single currency unit (such as U.S. dollars) for comparison purposes. One method of compensating for the exclusion of investing countries from the data series is the inclusion and splicing of later, more inclusive data with the earlier, less inclusive data series, as was previously mentioned.

The second strategy proposed by Chase-Dunn involves the ratio discussed earlier in this paper; the total sum of international capital flows and obligations divided by the world GDP. Chase-Dunn terms this ratio, in its deconstructed, country-specific form "investment dependence," meaning the ratio of the foreign debt to the national income. The weighted average of these country-level ratios then functions as a measure of world investment globalization. This measure has the same disadvantage as the first strategy, in that complete and inclusive data are not available until after about 1950, producing a data series biased toward core countries. However, it has an advantage in that, because it is a ratio, no conversion of country currency into U.S. dollars is required, and consequently, there is less chance of error entailed.

This plan for the measurement of investment globalization, given the availability of data for periods prior to 1950, is probably the most sophisticated design feasible. It emphasizes the interconnectedness of all forms of structural globalization, and measures investment globalization as a part of the ongoing process of global economic integration.

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