Foreign Investment Is Not a Problem for the Domestic Economy

by Mateusz Machaj

In recent months, the political atmosphere in Poland has become more nationalist, which is reflected in a growing anti-foreign attitude toward capital flows. The general argument used relates to the apparently negative aspect of interest payments and dividends on invested capital being transferred to foreign owners. “What a waste,” the complaints go, “cannot we leave everything in the hands of domestic owners, so that money stays in the country to provide employment? How can we let such a drain of resources occur?”

Thus, mercantilism seems to be alive and well in the twenty-first century, remaining extremely faithful to its initial fallacious tradition. The reality is, however, that capital flows resulting from foreign investments are not draining our country — or any other country — of anything. There is simply a price to be paid for using capital from abroad. Like anything with a price, capital flows have something to do with scarce resources. In these particular circumstances, capital financing has allowed Poles to purchase various productive factors of production in the international markets. This includes the whole bunch of know-how which flows in with it and creates the framework to increase laborers’ productivity. It should come as no surprise that in Poland foreign companies, or companies with majorities of foreign owners, are statistically paying significantly more to their employees than domestically owned companies. The feature applies to all types of employment, not only the board members, but the workers of all of the lower levels of employees. The capital flowing in has to simply bid for workers and offer higher wages. At the same time it still has a capability for better profit opportunities because it often benefits from ideas how to make labor more efficient and productive.

That is certainly a price worth paying for. In any case, the decision is not really done on some central level (unless we speak of public investments organized with capital inflows, which makes the whole story different). It is simply done by existing private parties: either local companies deciding to invite a foreign investor to co-finance, or simply selling the promising venture to a more experienced company. Or a foreign company starting from scratch is working with the local suppliers. All cases are performed in a dispersed manner, no one has to make a political decision about it. Just leave people with their business, and they know well what is good for their companies and how to use resources to be profitable.

Worrying about the payments for foreign capital makes just as much sense as worrying about the price of anything else. Take the case of importing oil as a necessary factor of production, for example. Do we have to worry about the fact we pay for oil? It would be great to get it for free, of course. That’s also true with renting foreign capital. Yet, productive goods can not usually be had for free and one has to bid for them. The price reflects the value received in exchange. Without that price there would be no exchange, and also no benefit that comes with it. As Mises pointed out in Economic Policy: Thoughts for Today and Tomorrow [5th Lecture: Foreign Investment]:

Foreign investment is made in the expectation that it will not be expropriated. Nobody would invest anything if he knew in advance that somebody would expropriate his investments.

To creatively rephrase Mises, there is a simple way to not pay interest to foreign capital: outlaw foreign capital. Similarly, there is a “way” to not pay for imported oil: forbid oil imports. Obviously, doing either would be disastrous and absolutely reckless. Exchange always has two sides. You cannot have one without the other. So by outlawing the payment of a price, you are also outlawing the value that can be obtained from such market exchanges.

Mateusz Machaj is founder of the Polish Ludwig von Mises Institute. He is an Assistant Professor at the University of Wroclaw, and teaches economics at the CEVRO Institut in Prague.

Source: Mises Institute


Leave a Reply