Verizon, Vodafone, and Measuring FDI

Recently back from APSA in Chicago, I've been reflecting on the state of our knowledge about FDI (or perhaps more accurately, cross-border management stakes in enterprises). That, and working on my dissertation, applying for academic jobs, and teaching. Oh, and telling everyone who'll listen about my Optimus Prime sighting on Michigan Ave.

Anyway, I find a post-conference review of the discipline is generally a good way to consider potentially fruitful lines of new inquiry. In my experience, the quality of papers at conferences can be rather hit-or-miss. This generally fits into my view of conferences as important sources of external deadlines for getting drafts done as well as interacting with other scholars in more informal settings such as the hotel bar/lobby/over-crowded coffee shop. And, I think that's enough to ask out of a conference.

However, there are generally one or two papers every conference that catch my eye in meaningful ways. They are often more conceptual pieces that challenge traditional approaches to measurement or quantitative analysis. Andrew Kerner's "What we talk about when we talk about foreign direct investment" was the stand out paper for me this year. According to his website the paper is under review and I'm not sure if he's widely circulating a draft at this time. Hopefully this piece will be published somewhere good soon because its well worth the read. The gist is that measures of FDI derived from balance of payment measures are grossly inadequate measures of the kinds of economic activity political scientists are generally interested in when we study the phenomenon frequently referred to as FDI. Not only do countries often have different definitions of FDI, but FDI flows bounce around for all sorts of reasons that are far removed from decision over making fixed, long-term investments in capital stock. Even worse, FDI flow data are reported in net terms, which makes it impossible to differentiate between a country that experienced a lot of inward direct investment concurrent with an equal amount of outward investment and a country that experienced no direct investment flows at all.

The recent news about Verizon's buy-out of Vodafone nicely illustrates some of the problems with current measures of FDI. Vodafone is a British company, so Verizon's decision to buy out Vodafone's share will register as a massive repatriation to the UK. The size of the deal is so large ($130B!) that it's going to influence measures of global FDI flows for 2013. For context, UNCTAD reports global FDI inflows last year were $1.35 trillion. That means this one mega deal is worth 10% of all total FDI net inflows last year! I doubt any political scientists would argue the Verizon-Vodafone deal reflects any underlying change in assessment of political risk in the US. But, that one deal will dominate 2013 measures of global FDI.

Kerner's entreaty is to use data sources that differentiate between flows of cash and real fixed capital investments. One limitation of such as strategy is that it limits us to modeling the investment decisions of either US or Japanese firms (since the US and Japan are really the only countries that make available such detailed data about the investment decisions of their foreign affiliates), and the investment behavior of firms from these countries might differ in important ways from firms headquartered in other countries.

Given the tendencies of those writing on this blog, as well as our co-authored academic work elsewhere, it may not be surprising that I'm partial to another tactic. It seems that all this semi-liquid investment caught up in measures of FDI might not be so easily captured through an obsolescing bargaining mechanisms (though, as Rachel Wellhausen pointed out in discussion, even cash can be effectively illiquid if there are restrictions on repatriation), but the flow of these investments across borders does influence banking systems, the growth of the money supply, the availability of credit both globally and domestically, and therefore the propensity for crisis. Perhaps one way forward here is to consider more explicitly the relationship between different kinds of financial flows and how their interaction affects both political and economic outcomes.

Politics of Hard Times - Macroeconomic Imbalances Edition

Yesterday morning I attended a panel at the annual American Political Science Association meeting on the macroeconomic and global responses to the financial crisis. Organized by Jeff Frieden of Harvard, the purpose of this panel was to discuss ways to revitalize theory building around the political economy of adjustment. Speakers included former chief IMF economist Raghuram Rajan , former Mexican president Ernesto Zedillo, and UNC professor Layna Mosley (MA thesis advisor to Will, Alex, and me). Overall, I found the discussion fascinating, although I wish that there had been more discussion about whether current conceptual and methodological tools are adequate for this task. Here's a quick run down of some main themes that emerged:

1) Current explanations of the Great Recession tend either to be mainly a macroeconomic imbalance story (without much political economy) OR a political story about regulatory failure due to rent seeking at the domestic political level. IPE scholars need to spend more time thinking about the political economy behind macro imbalances, and the complex interests and institutions that lead to variation in national economic policies. The question hear is why do some structurally important states become borrowers and why do others become lenders? Why do some governments adjust in time to structural imbalances and why don't others?

2) What are the political and economic consequences of an international political economy characterized by some states running persistent current account deficits while others run persistent current account surpluses? Rajan is particularly worried that an increased focus on export-oriented growth is creating a vicious cycle in which countries that would normally be in the best position to stimulate counter-cyclical AD can't because of enduring weakness in the domestic market. If I'm not mistaken, this point speaks to a running debate between Will and Thomas. (Perhaps someone wants to weigh in?)

3) How does growing inequality affect the politics of adjustment? Discussion on inequality focused mostly on the US and stems from Rajan's argument in his recent book, Fault Lines: How Hidden Fractures Still Threaten the World Economy. Rajan argues that technological changes are decreasing the wage advantages traditionally afforded by a college education, and that this effect is particularly important in thinking about inequality more around the 80/20 divide (I have no data on this - I'm assume this is in his book which I'm planning on reading after taking my Methods Comp). For him, the story here is that politicians have dealt with this growing inequality in the most politically expedient way - extending credit to those down the bottom of the distribution. Of course, the point here is that dealing with inequality this way leads to asset bubbles as we saw this time around. (This is the response to Will's post yesterday about performance pay and wage inequality. Rajan's take on this would be that democratic governments have to deal with inequality some way (even if some of rising inequality is merit based, as the 2007 NBER working paper suggests), and the problem is that the quick fix for elected officials is to pursue policies that do not change underlying structural inequality but also lead to increased demand for imports and financial instability.)

4) How has the Great Recession changed the way we study how governments choose to engage markets? This is Layna's main question and speaks to questions about how governments manage their debt, the role of official entities that hold sovereign debt on the rates states must pay to borrow, and whether the idea that advanced industrial countries have "room to move" still holds.

5) What are the prospects for macroeconomic policy coordination and global governance of capital markets when governments are dealing with the domestic politics of adjustment? Zedillo is particularly pessimistic about the future of economic interactions, especially between the US, the Eurozone, and China. Audience member Dan Drezner voiced concern about the politics of fiscal policy as more politically insulated monetary policy tools become less effective at managing downturns.

From my perspective, the take-away from this panel was that we just don't have a robust understand of the political implications of an international political economy with such deep structural macroeconomic imbalances. In order for IPE gain some explanatory purchase over the question panel members raised, we really have to re-conceptualize how to study IPE as a complex dynamic system. It is too easy to revert to a domestic political explanation. What states can do is constrained both by domestic and international politics and economics.