Bernard Avishai — Thomas Piketty And The Foreign-Investment Question

For years, development economists have suggested that, when companies from the developed world invest in poor countries, it helps to mitigate international inequality. Early in his book “Capital in the Twenty-First Century,” the economist Thomas Piketty expresses skepticism about this idea. The owners of corporate assets tend to pocket most of the income generated by those assets, he points out, so a foreign company operating in a poor country levels the field about as much as a rich person opening a sweatshop in a slum....

Changes in the makeup of corporate assets matters, in particular, when discussing international inequality. The gap between rich and poor countries is between knows and know-nots, not just between haves and have-nots. It used to make sense to assume that, once a domestic business owned material assets, it wouldn’t need a very high learning curve before it was working more or less profitably. But, while that outlook worked for products like soap, it doesn’t hold up for something like smart phones: virtually anyone with a factory, a recipe, and cheap labor can make soap, but building smart phones requires knowledge. Piketty understands the change, at least in principle. He writes that poor nations catch up with rich ones “to the extent that they achieve the same level of technological know-how, skill, and education,” which is “often hastened by international openness and trade.” But is trade alone enough to engender learning?

This is where foreign direct investment can be useful, if not indispensable. To profit from their investments abroad, global companies must deploy and increase intangible assets, partly by educating the people with whom they work locally—employees, business partners, and so on. Foreign companies introduce new production methods and management standards, and train local workers to enact them. They also introduce employees to a global network of suppliers and customers, crucial marketing knowledge for startups. In other words, foreign direct investment involves implanting intellectual capital, not just appropriating financial capital...

The good news—for Piketty and for everybody else—is that intellectual capital is not inherently scarce in the way that financial capital is. A global company does not give up technology or systems by sharing them, though, again, it might well lose the competitive advantages—and revenues—it gains from employing them. If I give you a dollar, I don’t have it anymore; but, if I teach you something, I don’t stop knowing it. The growing importance of intangible assets in itself might not mitigate inequalities, and might even exacerbate them, at least at first. But the role of intangible assets in foreign investment should inspire some hope that it could help reduce inequalities, too. In any case, this belongs in the conversation that Piketty’s book has, thankfully, occasioned.

New Yorker
Thomas Piketty And The Foreign-Investment Question
Bernard Avishai
(h/t Yves Smith at Naked Capitalism)