Some stylized facts about financial globalization from Federal Reserve Governor Frederic S. Mishkin:

Although economic globalization has come a long way, in one particular dimension–finance–it is very far from complete. As documented in the superb book by Maurice Obstfeld and Alan Taylor, Global Capital Markets, financial globalization has made its greatest strides in rich countries. Gross international capital flows, which have risen enormously in recent years, move primarily among rich countries. The exchange of assets in these flows is undertaken to a large extent to enable individuals and businesses to diversify their portfolios, putting some of their eggs in the baskets of other rich countries. International capital is generally not flowing to poor countries and is thus not enhancing their development…

As Nobel laureate Robert Lucas has pointed out, this feature of international capital flows is a paradox: Why doesn’t capital flow from rich to poor countries? We know that labor is cheap in poor countries, and so we might think that capital would be especially productive there. Just think of how hugely profitable a factory might be in a country where wages are one-tenth of those in the United States. Capital should, therefore, have extremely high returns in such countries, and we should expect massive flows of capital from rich countries (where the returns on capital should be relatively low) to poor countries (where they should be far higher). In fact, there has been a big increase in the amount of capital moving to emerging-market economies in recent years, but capital primarily still flows from one rich country to another, where the returns on capital are similar.

Thus, financial globalization is far from complete, and that fact raises a set of questions. Should financial systems in developing countries become more integrated with the rest of the world? If so, what should be done to accomplish that integration?

We all know about Unocal and Dubai Ports World. Ray Seilie points to the latest case of US hostility to inward FDI: a ban on foreign ownership of U.S. airlines is being used by legacy carriers to impede the establishment of Virgin America.

The LA Times editorial on this story is pretty good. Having flown Virgin Atlantic and enjoyed it very much, I wish it were legal for Richard Branson to enter the airline business in the US. Instead, he’s merely licensed the Virgin name to a group of American investors. But the legacy airlines are doing their best to bury the start-up in red tape.

“For the first time in six years roughly, the airlines are starting to experience some profitability, and the last thing that the domestic carriers want to see is new competition,” said Dan Petree, dean of the college of business at Embry-Riddle Aeronautical University. [CNN]

Virgin shoots back:

Instead of focusing on actual facts that show we are an American-owned and -controlled company, they have created irrelevant conspiracy theories about our application. It is farfetched to argue that U.S. citizens are somehow foreign, that debt is equity or that standard provisions protecting minority investors constitute ‘actual control’ of a U.S. airline that is clearly managed by U.S. citizens and 75-percent owned by U.S. citizens.

I think the phrase “regulatory capture” implies that the regulation initially had a legitimate purpose. A blanket prohibition of foreign ownership strikes me as an extremely crude method of reducing security risks. As Ray notes, “sadly, domestic airlines have every incentive to inflame this nationalistic fear-mongering.”

Interesting paper from 2000 that I encountered today:

In Interpreting Developed Countries’ Foreign Direct Investment (NBER Working Paper No.7810), NBER Research Associate Robert Lipsey suggests that flows of foreign direct investment (FDI) among developed countries, where most FDI occurs, have little to do with the location of production. To a large extent, they are changes in ownership of specific productive assets, presumably from less efficient to more efficient owners and managers. There may be no change in the geographical location of aggregate production or production in a particular industry.

I was going to link to this story, but I see that Pablo Halkyard has a more comprehensive post.

President Evo Morales of Bolivia plans to nationalize the oil, gas, mining, foresty, and other natural resource industries. Foreign companies are unlikely to be compensated for their confiscated assets.

“Morales sent soldiers and engineers with Bolivia’s state-owned oil company to installations and fields tapped by foreign companies… The companies have six months to agree to new contracts or leave Bolivia, he said.” [Forbes]

“Morales had long pledged to nationalize the sector but said repeatedly he would not expropriate companies’ assets.” [CNN]

“The Mafia doesn’t buy FedEx to smuggle.” — James Carafano of the Heritage Foundation

[Hat tip: Hit & Run]

Hamish McRae: “Globalisation is fine, unless it means Dubai”

A Dubai company seeks to buy a British one that happens to operate a string of ports in the US – much to the annoyance of some US congressmen. An international steel group headed by an Indian family seeks to buy a French/Luxembourg steel company, much to the chagrin of President Chirac. A Russian energy group is said to be trying to buy a British gas company, which would certainly cause the fur to fly here. Welcome to globalisation, 2006-style. [Independent]

Dan Drezner has a nice round-up of reasons not to worry about DPW’s buyout of P&O. The most important is that P&O doesn’t do security at ports.

UPDATE: Drezner has more cases of backlash against FDI.

An IHT piece acknowledges the arrival of India Inc. Groups like Tata and Reliance have survived cut throat competition and are now pursuing acquisitions in markets like the United States.

The U.S. trade deficit is financed by its attractiveness as a destination for foreign investment. It may be losing its relative advantage — IHT

Britain’s leading companies are less adventurous than their US and continental European counterparts when it comes to making foreign acquisitions – and they are becoming even shyer, according to research by KPMG, the accountancy group.

The study of acquisition trends from 2000 to 2005 shows that continental European companies are five times more active than those in the UK in the so-called Bric economies – the big and fast growing markets of Brazil, Russia, India and China. Continental European companies are also more open to acquiring companies in the “emerging markets” of east and central Europe.

As a result, British companies are in danger of irretrievably sacrificing growth potential to European competitors and depriving shareholders of growth opportunities, the study says…

One explanation for the weak showing appears to be that the types of companies investing most heavily in the Bric countries – typically manufacturing companies in France, Germany and the US – are not well represented in the UK.

But Simon Collins, head of corporate finance for KPMG, said that explanation was losing its force. “The US is quite service-led and there have been a lot of acquisitions by US services companies, particularly in China and India.” He said the idea that these economies were drawing a lot of skittish capital was outdated. “It’s evident now that there is some very well researched corporate investment going into emerging markets.”

The study has tracked 9,808 acquisitions around the world since 2000 with a deal value of $4,230bn (£2,369bn). British companies were on average twice as active as their US counterparts and 40 per cent more active than continental European companies in terms of the numbers of acquisitions. [Financial Times]