Polarization of the profit rate and foreign direct investment in western and eastern countries of the European Union
Loading...
Date
2024-09-18
Authors
Γρουμπός, Δημήτριος
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
The aim of this study is to contribute to the understanding of the motives behind foreign direct investment (FDI) by using a contemporary Marxist theoretical approach that draws inspiration from the Marxian analysis of the profit rate, which critically incorporates aspects of Marxist and non-Marxist FDI theory.
The central research question is which are the main motives that drive capital to invest, in the form of FDI, in relatively less developed countries in the developed world, and specifically in Eastern economies within the European Union (EU).
To address this question, the theoretical framework builds upon the basic logic behind Marx’s theory concerning the fall of the rate of profit and its relationship with uneven development and capital exports (FDI). The main argument is that, under certain preconditions, persistent profit rate differentials between countries can help explain the international movements of capital, in order to either avoid the tendency towards crisis in its home country or simply seek a higher profit rate abroad. In order for FDI movements to take place it is therefore presupposed that on a world scale international differences in national rates of profit are preserved and reproduced.
Although this is the main approach followed in the present dissertation, the study additionally argues that international profit rate differentials are not sufficient per se as a motive of FDI, and poses certain preconditions which must be met in order for FDI to actually take place. The preconditions which must be met in order for FDI to be actually directed towards relatively less developed countries with relatively higher rates of profit are: (1) the presence of firms with sufficiently superior productivity, in more developed countries, that enables them to compete through controlled foreign production in other countries; (2) a sufficient level of industrial development in relatively less developed host countries; (3) the home country and host country of the investment must have, more or less, similar productive structures.
These preconditions, combined with a basic Marxian analysis of the profit rate, essentially point out that: (a) FDI will tend to be attracted to industrial host countries which are at a relatively lower level of development compared to the home country, as the superior productivity of multinational enterprises (MNEs) from more developed countries, coupled with the usually higher profit rate in relatively less developed countries, leads MNEs to invest in the latter; (b) MNEs will tend to invest in countries that produce a similar range of goods with their home country, which is often the result of either the need to bypass protectionist policies, imposed by similarly advanced industrial countries, or the fact that relatively less developed industrial countries can produce similar goods with the home country at a lower cost.
The study includes an empirical analysis in order to test the proposed theoretical framework, by examining the different dynamics of the profit rate and FDI in two distinct country groups within the EU. Specifically, the first group (group 1) consists of more developed industrial Western EU countries, namely, Belgium, France, Germany, Italy, and the Netherlands – which are EU founding members and part of the EU core – while the second country group (group 2) consists of relatively less developed industrial Eastern EU countries, namely, Czechia, Hungary, Poland, and Slovakia – which are former Eastern bloc transition economies, also known as the Visegrad countries.
The empirical analysis is divided into a macroeconomic country group analysis and an individual country sectoral analysis. The aim of the macroeconomic analysis is to examine how the profit rate, combined with the possible impact of other factors, may help explain overall patterns of inward FDI in the two EU country groups. Specifically, the macroeconomic analysis examines the impact of the profit rate, market size, trade and/or monetary protectionism, and long-term FDI attractiveness on inward FDI for each group. The sectoral analysis includes two parts. One part focuses on individual countries’ sectoral FDI and trade. The sectoral analysis of FDI and trade is performed in order to detect potential additional motives behind sectoral FDI, and thus estimate the main type of FDI realized in each country group. The other part includes an investigation, depending on data availability, of sectoral profit rates and FDI in order to examine if individual national sectors with a relatively higher rate of profit tend to attract more FDI.
The main finding of the empirical macroeconomic analysis is that the profit rate seems to play an important role in determining overall patterns of inward FDI in both country groups, especially in group 2. It is shown that group 2 has a relatively higher profit rate between 1995 and 2021, a period during which inward FDI demonstrates an overall increase. On the other hand, group 1 has a relatively lower profit rate between 1991 and 2021, a period during which inward FDI demonstrates an overall fall. It is shown that the lower profit rate, as well as the overall downward trend of the profit rate, for group 1 is the result of both the overall rising net fixed capital stock required to produce a unit of net product (Marxian “Law of the Tendential Fall in the Rate of Profit”), and the overall increasing labor share in net product (“Capital Over- Accumulation”). The higher profit rate in group 2, as well as its overall upward trend, is shown to be caused by the overall declining amount of net fixed capital stock required to produce a unit of net product, and the overall declining labor share in net product, compared to group 1 – which indicates that foreign capital invested in group 2 takes advantage of both low wages and rising labor productivity.
This means that persistent intra-EU wage differentials, given that Eastern EU members have gradually closed the productivity gap with Western EU members, enables foreign capital to capture extra-profits from relatively less developed Eastern EU members, through the substitution of higher-paid labor with low-paid labor, leading to a form of economic imperialist exploitation through intra-EU “labor arbitrage.” Thus, despite the ongoing process of European integration, forms of uneven development within the EU seem to have led to a polarization of the profit rate in Western and Eastern EU countries. The present study argues that, ceteris paribus, this polarization of the profit rate seems to have played an important role in determining overall FDI patterns in Western and Eastern EU countries during the last three decades.
Other factors that seem to influence inward FDI according to the macroeconomic analysis are market size, trade and/or monetary protectionism, and long-term FDI attractiveness. According to the sectoral analysis of FDI and trade, increased FDI in group 2 seems to be primarily of an export-oriented type, especially in the automotive industry. FDI in group 1 seems to be of both a market-seeking and export-oriented type. The top recipient sector of FDI in all countries of group 1 is the chemical products sector, in which FDI seems to be mainly of a market-seeking type.
Finally, the investigation of sectoral profit rates and FDI in Germany and Czechia indicates that individual national sectors with a relatively higher profit rate, compared to the business sector’s national average profit rate, tend to attract more FDI compared to other national sectors.
Description
Keywords
Profit rate, Foreign direct investments, European Union