In this short review, Bob Hancké of the London School of Economics points out that not all foreign direct investment is motivated by reallocating resources to more efficient regions. 

Globalisation often also means that beside markets becoming international, investment crosses borders: Coca Cola and GM buy brownfield or build greenfield factories to produce elsewhere. While organised labour rarely rejoices when this happens, especially if it costs jobs at home, foreign direct investment (FDI) is not necessarily a bad thing: a more efficient allocation of resources is a good thing for everybody, poorer countries get richer, and the wealthier countries should easily be able to handle the social dislocation associated with that. Financial globalisation supposedly oils the wheels of this reallocation of resources.

Mossack Fonseca was a law firm critically involved in the ‘Panama Papers’ scandal helping companies to reallocate financial resources to international tax havens. (Source: Moscow LiveCC BY-NC-SA 2.0)

In a very interesting recent post on Quartz, Max de Haldevang sheds some light on this aspect of financial globalisation. He thinks a lot of FDI is simply transferring money from countries with a transparent tax system to opaque tax havens, without any productive use. According to an IMF paper he cites, as much as 40% of global so-called FDI is nothing more than money moving around quickly.

If that is the case, the argument for financial globalisation as a force of reallocation weakens tremendously – and even a Tobin tax, a remedy beloved by many observers on the Left and in trade unions, will not resolve that. For the problem is not financial speculation activity with wafer-thin margins, but the consequence of some countries developing a business model that relies on systematically undercutting the regulatory and financial standards adopted elsewhere.

Bob Hancké is Associate Professor of Political Economy in the European Institute at the London School of Economics.