Global Capital Flows

Over the past twenty years global capital flows (see Box 11.5) have been one of the principal areas of change and growth and many argue that it is in this area that the main developments in globalization have taken place (Strange 1994). Two aspects are most pertinent: the volume and the nature of these flows and their spatial distribution. With regard to the first aspect, there has been an explosion in the volume of financial transactions—dealing in cur­rencies and other forms of risk minimization—to the extent that the amounts now traded dwarf the value of world trade (i.e. the transactions necessary to pay for international trade in goods and ser­vices). This has brought about a fundamental shift to what has been called the 'symbol' economy of capital movements, exchange rates, and credit flows (see Case Study 4, Box 11.6). The conse­quences of this change can sometimes be severe as national currencies are devalued and revalued by the activities and concerns of the 'market' rather than by the actions of governments—although this need not necessarily be bad, most national politi­cians regard it as bad in times of crisis! Much of the volume of transactions of capital flows is thus 'dis-embedded' from the needs of the 'real' economy, and this can cause chaos at times: we do now live in a global economy that is thoroughly internationalised in its expanding core areas of commod­ity trade and production capital, and which is globalizing apace in the case of money flows and financial capital. We also live in a world in which the markets can defeat even the most concerted efforts by a government, or even groups of governments, to defend particular national exchange rates and interest rates. (Agnew and Corbridge 1995: 177-8)

The second aspect of capital flows that is import­ant is their distribution. The 1970s saw a very large growth in foreign direct investment (see Box 11.5), partly financed by the increase in oil prices, but by the 1980s most of the capital flows were focused on the Triad economies—by 1989 more than 80 per cent of the world's Foreign Direct Investment came from and went to the Triad regions. The less-devel­oped and poor countries together accounted for only 3 per cent of the total of world flows between 1986-91. As Petrella (1996: 70) points out, 'Less-developed countries have been abandoned as sites for investment.' This is a startling development which will surely have major political conse­quences in future international politics, represent­ing as it does the triumph of private values, emphasizing short-term returns on investment over public flows of capital towards longer term infrastructural development (clean water, trans­port, roads, power, etc.). This development is entirely predictable given the political domination of the values of neo-liberalism, but what is surpris­ing is how quickly it has come about.

International Production and the Transnational Corporation

Conventional IR theory recognizes the emergence of 'transnational corporations' (TNCs) as new and significant actors in international relations and international political economy. TNCs, often with turnovers as large as many states, are indeed signif­icant actors, but what is most significant is the underlying changes that TNCs both represent and are bringing about. The importance of TNCs in the system of international production cannot be over­estimated—so much so that some observers have argued that a new form of diplomacy is necessary, that between 'state' and 'firm' (Stopford and Strange 1991). However, others argue that interna­tional production is over-emphasized (Hirst and Thompson 1996).

Box 11.6. Case Study 4:'The Symbol of Economy'

'The third major change that has occurred in the world economy is the emergence of the "symbol" of economy—capital movements, exchange rates and credit flows - as the flywheel of the world economy, in place of the 'real' economy—the flow of goods and services... World trade in goods is larger, much larger, than it has" ever been before. And so is the 'invisible trade', the trade in services. Together, the two amount to around $2.5 trillion to $3 trillion a year. But the London Eurodollar market, in which the world's finan­cial institutions borrow from and lend to each other, turns over $300 billion each working day, or, $75 tril­lion a year, a volume at least 25 times that of world trade. In addition, there are the foreign exchange trans-actions in the world's main money centers, in which one currency is traded against another. These run around $150 billion a day, or about $ 35 trillion a year—12 times the worldwide trade in goods and ser­vices.'

(Drucker 1986: 781 -2: figures are for 1985/6)

The problem is 'how do we know?' and the answer is 'with difficulty!' And this is because the information that we have about the international economy is just that—information about the inter­national economy, based on the traditional model of trade and investment between national political economies (See Fig. 11.1). These figures do not reflect the rise of international production—pro­duction by firms outside of their home countries— because they are based on a model that takes no account of this development (see Case Study 5, Box 11.7). International production began to exceed total world trade flows in the middle of the 1980s—how does this change our understanding of the world economy?

First, and referring to Case Study 5 (Box 11.7), measures based on the model of the international economy distort the overall picture of the world economy—they only measure certain aspects and ignore the rest. And this has direct political consequences—consider the political problems generated by the conclusion based solely on con­ventional trade balance figures that the US has been running a massive balance of payments deficit, par­ticularly for the US-Japan relationship.

Second, and this point is emphasized by Ruggie and others, international production has led to more and more of the world's goods being pro­duced and marketed through firms' own organiza­tional structures ('administrative hierarchies') rather than markets (Ruggie 1995; Stopford & Strange 1991). Rather than national firms trading internationally, with prices and quantities being set by the operation of national/international markets (as in almost all economic theory), TNCs set up pro­duction and set 'prices' within their subsidiaries and co-owned firms, across territories, on the basis of their own internal needs and priorities, rather than working within prices and production set by the 'market'. This has fundamentally changed both the nature of production and the possibilities of government influence on and control of produc­tion. We can see this in the growth of 'intra-firm trade': trade among the different divisions of the same TNC, or trade with other companies linked by a strategic technology agreement. We know that this is very important, and it is growing, but we have no real way of measuring it:

Once this system of international production, organized,managed and planned by firms, takes over and comes to dominate the system of production for local national markets under rules laid down by national governments, there is a fundamental change in the economic base of the world of states, in the power and even possibly the legiti­macy of the state (Strange 1994a: 210; emphasis added).

Box 11.7. Case Study 5: Taking International Production Seriously

'A recent US Department of Commerce study sought to measure what the US position in world markets would look like if the standard balance-of-trade meas­ure were combined with the net effects of sales by US-owned companies abroad, and by foreign-owned companies in the United States. It found that, on this more inclusive indicator of net global sales and pur­chases, the United States has consistently been earn­ing a surplus, rising from $8 billion in 1981 to $24 billion in 1991, even as its trade deficit deteriorated during the same period from $16 billion to $28 bil­lion.'

(Ruggie 1995: 518)