The relationship between the corporate surplus and NFC domestic investment and net FDI in the UK
Does the rise in corporate savings since 2001 reflect the fact that UK companies have been creating and acquiring assets abroad rather than creating them at home? Whereas the latter is counted as expenditure (thereby lowering the corporate surplus all else equal), the former does not.
The IMF seems to think so:
“The (net) purchase of equities from the rest of the world shows that non-financial corporations in the United Kingdom and the United States have been pursuing a strategy of expansion through acquiring assets abroad, including in emerging markets. Rather than financing new investment at home, part of the internal funds available to non-financial corporations in these two countries has been used to purchase existing capital equipment” (IMF 2006, p. 147)
The IMF says that if ‘…. For the United States, if net direct investment abroad by non-financial corporations is added to their domestic capital spending, nominal total NFCS capital spending in 2004 is broadly at the same level as in the late 1990s. This suggests that one factor behind the relative weakness of domestic capital spending by non-financial corporations in the United States in recent years is their increased financial investment overseas’ (IMF 2004, p. 147)
However, the data for the UK does not support the hypothesis that the downturn in domestic capital investment since the tech bubble is associated with an increase in net FDI, which is here a proxy for fixed capital formation abroad.
Source data: Capital Formation (ONS National Accounts updated 30/07/2010). Non-financial corporations: domestic investment (DBGPSource + DBGM) (Table 3.1.7) Net Foreign Direct Investment (Business Monitor MA4 Foreign Direct Investment 2009). (Total net FDI abroad – Total Financial services Net FDI abroad) – (Total Net FDI in UK – Total Financial Services Net FDI in UK) (MA4 1.1, 2.3. 5.3); Nominal GDP (ONS National Accounts) (YBHA) (Table 1.2)
As the graph shows, net FDI has fallen significantly since its peak in 1999 and 2000 when it stood at 6.8% and 7.4% of GDP respectively. The sum of net FDI and fixed capital formation (the sum of gross fixed capital formation and the change in inventories) has not come anywhere near that peak again. Net FDI even turned negative in 2005, 2006, and 2009; if net FDI is accepted as a proxy for fixed investment abroad, 2005, 2006, and 2009 are by far the weakest years in the graph. The data cannot support the argument that UK NFC have simply become more outwardly oriented. Including net FDI increases rather than decreases the amount by which capital investment fell following the tech bubble, especially in the 2005-2006 period when net FDI was negative. If net FDI is to be invoked as a counter-balance to explain the falling level of domestic capital formation, then net FDI and domestic capital formation should be negatively correlated. In fact however, over the period 1997 to 2009 they have a positive correlation of 0.44. Furthermore, the variance of the series increases if net FDI is added to fixed capital formation. Far from stabilising investment, as the IMF was suggesting, the inclusion on FDI destablises it.